Before Buying a Flip, Map Out Your Holding Costs

September 23, 2022

Holding costs have the ability to make or break a flip. Successful investors anticipate holding costs before starting a project.

Holding costs sit on the less glamorous side of any flip. From home improvement television shows to Youtube channels, flippers share their success stories and walk you through the property transformation. Behind the scenes, there’s a tremendous amount of planning involved.

Without proper planning and knowledge, liabilities, time spent on projects, and holding costs pile up. Before buying a flip, make sure you map out these holding costs more than anything.

What are holding costs?

Holding costs (or carrying costs) are the fees for holding a property during the flip process until a sale has been made. After purchasing a fix and flip home, time is critical for profit. More time holding the property means that monthly expenses build up.

An experienced flipper knows to prepare for the worst and hope for the best with renovation timelines. With the right planning, these costs are more predictable. However, what you don’t know will hurt your bottom line. Let’s look at the most common holding costs that you should map out.

Loan

If you’re financing your investment, you’ll be making monthly payments in the form of a hard money loan or a traditional mortgage. Loans usually require a downpayment or points, which incur interest. There are different types of loans you can apply for depending on your situation. Regardless, you need to pay close attention to the terms.

Loans and interest are a large portion of your holding costs. For instance, a construction loan is available if you’re building a home from the ground up. This type is paid off after you sell the home. Additionally, there are renovation loans available which appraise the home with the after rehab value. The costs of repairs are already factored into the loan.

The longer it takes you to complete the project, the more you may owe. When estimating your payments, it’s wise to overestimate so that you have wiggle room in your budget if something goes wrong.

Insurance

Even if you have a vacant property while you’re working on the house, you still likely have to pay insurance every month. If the home is unoccupied while you handle renovations, a special insurance policy may be required in your state.

Since nobody is living in the property, newer investors don’t know that this policy costs more than traditional home insurance. Not to mention, you need your property insured in case the project site has expensive tools and equipment inside. While laborers are not working, dealing with a break-in and having equipment stolen is a whole other problem to deal with.

Before buying a property, get estimates from various insurance companies. That way, you can anticipate insurance costs.

Utilities

Flippers are responsible for water, electric, oil, and gas that factor into holding costs as utilities. Some utility businesses require a deposit in advance for rental properties. Additionally, you don’t want to call utility companies the day before the project starts. It may take up to a week to activate utilities–renovating without that could pose a problem. This would set your entire project back if you don’t map out your plan.

Are you investing in a new market? Another important factor to consider is your local climate. Places with high temperatures or humidity will require air conditioning to prevent problems such as mold. On the other extreme, skimming on heat could lead a pipe to burst. Pay close attention to season and climate conditions when flipping houses.

Utilities take up more usage for construction than they do for regular day to day living. Factor in additional utility costs especially if you are working with a larger-sized property. Experienced investors tend to call the previous owner and ask them how much they were paying monthly and budget higher for renovations.

Taxes

While holding the house, the investor is responsible for property taxes. Although each locality’s rate varies, there are typically ways to anticipate this. You can look into what previous owners paid and contact the town hall to learn more about how they plan to calculate your property taxes.

After you sell your flip for a profit, the inevitable happens. You owe taxes depending on your property type and location. Since most home flippers are aiming to sell quickly, they will likely have to pay capital gains tax for short-term sales. Short-term capital gains tax is not so favorable to a real estate investor, however, a Certified Public Account (CPA) can help you navigate this best.

To prepare for tax season, it’s important to keep great records. This, plus working with CPAs and tax attorneys to implement an effective tax strategy are things to consider.

Marketing costs

The money spent on marketing isn’t so much if you use a real estate agent, but that comes with paying the real estate agent’s commission. If you don’t use a real estate agent, you have to map out for sale signs, flyers, digital ads, listing fees, and more. Open houses also mean that you’ll be doing regular maintenance after your flip is complete and you’re ready to stage the home. This includes keeping the home clean and keeping up with landscaping services to create the best first impression possible.

Be mindful of holding costs

A lack of a thoughtful plan is going to create a headache with holding costs. Buying a flip is already risky as you make yourself vulnerable to fluctuating housing markets.

The best thing you can do is boost your awareness and make your plan as predictable as possible. If you’re uncertain about holding costs, start budgeting and mapping them out. Even if buying a home flip doesn’t go your way, you can calculate your estimated costs and time from purchase to final closing on the sale.

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