Fix-and-Flip Calculations: How Much Financing Should You Take On?

Did you know that the total value of the U.S. housing market is roughly $45 trillion? For many investors, these homes are an ideal real estate investment. But how can you calculate the fix-and-flip expenses of your latest home?

If you’re curious about house flipping, we’re here to help. Read on for a brief overview of the most effective ways to calculate your fix-and-flip expenses. We’ll also look at some of the features that will affect your loan, expenses, and net profit.

How Do You Calculate a Fix and Flip?

A good fix-and-flip calculator will help you work out the costs of your fix-and-flip loans, expenses, and more. Essentially, a calculator better helps break down your costs, revenue, and net profit. It’s a crucial tool for understanding the financial situation of your latest house-flipping venture.

A fix-and-flip calculator requires several inputs to see the costs. These include acquisition, renovation, repairs, carrying, and closing. Here’s a more detailed breakdown of the costs:

  • Purchase Price: The cost of acquiring the property.
  • Repair Costs: This includes the cost of labor and materials for all necessary renovations. Be sure to factor in unexpected costs by adding a buffer to your initial estimates.
  • Selling Costs: These include realtor commissions, closing costs, and any marketing expenses incurred while selling the property.
  • Holding Costs: These are the expenses associated with owning the property while it’s undergoing renovations and waiting to be sold. This includes property taxes, insurance, and interest on any loans used to finance the project.

Additionally, you should have an estimate for the after-repair value of the property or ARV. This is the estimated market value of the property after renovations are complete. An accurate ARV assessment is crucial for calculating the project’s feasibility. You can research similar recently sold homes in the area to estimate a realistic ARV.

Once you have a handle on the revenue and cost estimates, you can calculate some key metrics to determine the potential profitability of most fix and flips

  • Total Investment: This is the sum of the purchase price, repair costs, and holding costs as determined by your fix and flip calculator.
  • Gross Profit: This is the difference between the ARV and the total investment. (ARV-Total Investment)
  • Net Profit: This is the gross profit minus the selling costs. (Gross Profit -Selling Costs)
  • Return on Investment (ROI): This is a profitability metric that expresses the net profit as a percentage of the total investment. It’s calculated as: (Net Profit / Total Investment) x 100%

How Much Money Do You Need for a Fix and Flip?

Now that we better understand how to calculate the costs for a fix and flip home, let’s take a look at how to put it into action.

While there are many automated tools you can use for these calculations, it’s rarely more complex than adding, subtracting, and dividing. You can do these calculations by hand but don’t hesitate to use tools to ensure accuracy.

Purchase Price: Acquiring the Home

Your first step is to see how much it will cost to acquire the home. In most cases, this is the most expensive step in your fix-and-flip journey.

The price of a home varies drastically depending on location, condition, size, age, and more. For a house flipping project, you should look for homes that are in need of repairs and renovations. Primarily, this is because these homes are cheaper than others.

Research the area you’re investing in and think carefully about if a home is worth it. Is the home in an area where you’ll struggle to sell it once you’ve fixed it up? Will you make enough for the flip to be worth the effort?

Repair Costs: What Needs Fixing?

One of the best ways to decide if a home is worth it is to look at how intense the repairs will be. How much will you need to sink into the home to make it a sellable property?

You shouldn’t only calculate costs. Some house-flipping projects can take months. Homes in need of significant repairs or renovation can take a year or more.

Before purchasing a property, learn as much about it as possible. If the owner will allow you to do so, you should have it professionally inspected.

Furthermore, don’t only look at the home itself. Survey any attached properties such as sheds, garages, yards, and other properties that you’ll acquire with your purchase. These will all be part of your renovations.

Once you know what needs fixing, get estimates on the financial cost and time they’ll need. You’ll need these costs for your fix-and-flip calculator.

Selling & Holding Costs: Time On Market

One step that first-time house flippers sometimes overlook is how long a home will take to sell. For every day that a home is on the market, you’re continuing to accrue costs.

A home that takes too long to sell may need to drop in value. If the home is in an undesirable area, such as far from cities or in too cluttered of urban space, it may struggle to attract buyers.

What is the 70% Rule in Flipping?

A common rule of thumb used by flippers to estimate a profitable purchase price is the 70% Rule. This suggests that you shouldn’t pay more than 70% of the ARV minus the estimated repair costs for the property.

Here’s the formula:

Maximum Purchase Price = ARV x 0.7 – Repair Costs

For example:

Let’s say you’re considering a property with an ARV of $200,000 and anticipate $50,000 in repair costs. Using the 70% rule, the maximum price you should pay for the property would be $90,000. See below for how to calculate that price.

Maximum Purchase Price = $200,000 x 0.7 – $50,000 = $90,000

Deciding on a Loan

Another critical factor in your fix-and-flip calculator is the cost of the loan to purchase the home. Here are three factors in deciding your fix-and-flip loans.

Necessary Funds

To start, calculate how much money you’ll need for your project. To do so, you should add up all of the previously discussed costs: acquisition, repairs, and the time to sell the home.

With this number, you can see how high of a loan you need. You shouldn’t take a loan for significantly more than the home requires. Doing so can cause extra interest fees.

Loan Duration

Additionally, look at how long you’ll need the loan. Loans are almost always given with a term of duration. Common durations include three, six, nine, and year-long loans.

The longer a fix and flip loan, the more time there is for interest to accrue. However, a longer loan also can give you lower monthly payments.

Consider both factors for your fix-and-flip calculations. It’s a good idea to run the calculations on all possible loans so you know which will leave the most capital gains.

Interest and Profit

Your last factor in deciding on a loan is to look at the net profit of each loan. Are you taking out a loan that’s more expensive than the property? Will you struggle to pay off the fix-and-flip loans if the home doesn’t sell fast enough?

The longer it takes the home to sell, the more interest will accrue. If the home doesn’t sell soon, the interest can add up to cost more than the home did. As such, your net profit has vanished.

Calculate the worst-case scenario and see how much profit is left. These risks are baked into investing, so don’t let them scare you away from your dream investment.

Having a fix-and-flip calculator will help you to weigh the risk of investing in a property. Knowing the costs of your house-flipping requirements will show you whether fixing up a property is worth your time, money, and effort.

Merchants Mortgage and Trust has been the private lender of choice for real estate developers across the United States since 1961. We pride ourselves on building successful, long-term relationships with our clients. If you are interested in learning more about our competitive commercial multifamily financing options and would like a no-obligation quote, we’re happy to connect, so contact us today!

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