Calculating Fixed Costs
A previous article discussed The Flip Formula for determining whether or not I consider a flip project to be worth undertaking. In my formula, I referred to “Fixed Costs” and I mentioned that my Fixed Costs for a recent project were about $17,000. I wanted to elaborate on that a bit more, so as to help other investors who use The Flip Formula assess their own Fixed Costs.
Fixed Costs are compromised of the various fees, commissions, and costs associated with all parts the investment project (outside of the actual rehab costs). While each investor (and each project) likely has their own specific fixed costs, for me they can generally be broken down into the following three categories:
- Purchase Costs
- Holding Costs
- Selling Costs
And then each of these categories can be broken down in more detailed expense line-items…
Purchase Costs
Purchase Costs refer to those fixed expenses that contribute to the purchase of a property. For my projects, Purchase Costs can specifically be broken down as follows:
- Inspection Costs: In general, I have an inspection for each of my properties prior to purchase. I use the same inspector for every inspection, and for the most part he charges about $400 for a full inspection of a typical property.
- Closing Costs: Each purchase comes with a fixed set of closing costs paid by the buyer. In Georgia, and for REO purchases, this generally includes a title search, attorney fees, courier fees, recording fees, state taxes, document review fees, etc. Basically, all those ridiculously inflated costs charged by the closing attorney to ensure clear title and recording of the new deed. Across all my purchases, these costs generally come in around $1000.
- Lender Fees: For the most part, I use the same lender to finance each property purchase. The lender charges a set of up-front fees to fund the loan, including a Loan Origination Fee, appraisal, underwriting fee, flood certification, document preparation fee, processing, fee, credit report fee, etc. (again, all those ridiculous and inflated fees that contribute to the lender’s bottom line). While every investor and every lender will have a specific sets of fees — and while these fees are somewhat tied to the purchase price of the property — for a typical acquisition I do, these Lender Fees total around $2000 per property.
Holding Costs
Holding Costs refer to those expenses that add up between the time I acquire the property and the time I sell the property. For my projects, Holding Costs can specifically be broken down as follows:
- Mortgage Payments: On a typical project, my monthly mortgage payment will be about $500. And a typical project — from purchase to sale — will generally run between 4-6 months. So, during that time, I’ll generally make about $2500 worth of mortgage payments to my lender to keep the property.
- Property Taxes: On the properties I purchase, the typical yearly property taxes are on the order of $1400. Again, if I hold the property for 4-6 months, this will average out to about $600 in property taxes per project.
- Utilities: While performing rehabs, I like to ensure that all utilities (electricity, water and gas) are turned on. This is both for the convenience of my contractors as well as to help diagnose any issues with the property. Because the seasons in Georgia tend towards extreme temperatures, I’ve found that my utilities in my properties generally run about $200 per month for the duration of the project. Again, over 4-6 months, this averages about $1000 per project in utility costs.
- Insurance: Typical insurance costs for my properties is about $350-400 per year. On average, I pay about $200 in insurance costs for each project.
Selling Costs
Selling Costs refer to those fees and commissions that must be paid for me to sell a property. Again, different investors will use different marketing mechanism to sell their houses, so selling costs for each investor may be quite different. For my projects, Selling Costs can be broken down as follows:
- Commissions: Because my wife is our real estate agent, we save about half of the commissions we would otherwise incur when selling a property. That said, if our buyer has their own agent — they generally do — we must pay about 3% of the purchase price to that agent at the sale. A typical property of ours sells at about $120K, so that 3% comes out to about $3600 paid to the buyer’s agent at the sale of our property. Add to that the fees my wife pays to her broker, and the total commissions average about $3900 per property sale.
- Closing Costs: In this market, most buyers ask the seller to pay some or all of their closing costs. On our sales, we’ve been asked to pay anywhere from $2000 to $6000 in closing costs for the buyer. On average, we’re asked to pay about $4000 in buyer closing costs, and because it is a buyer’s market, we generally agree to it.
- Home Warranty: Most first-time home buyers (the type we cater to) request that the seller purchase a home warranty as a condition of the sale. We always expect to do this (and almost always have), and this adds about $500 to the cost of the sale for us.
- Termite Letter: In addition to the home warranty, many buyers (and/or their lenders) require us to provide a proof of termite inspection at the sale. This generally runs somewhere just below $100.
- MLS Fees: Because my wife is our agent, she is required to pay a fee to the local MLS for listing the property. This generally runs about $100.
As you can see above, buying, holding and selling a property can cost a lot of money in fixed fees. Let’s see how these add up on a typical project of mine:
And there you have it — it costs me about $16,500 in commissions and fees just buy, hold and sell a property. Many investors ignore these costs when calculating their potential profit on a deal; but, consider that if you plan to earn about $15K on a typical project, these costs can actually mean the difference between earning your desired profit and losing money!
Great post! Thanks.
Hey man thanks for taking your time in helping others making and huge diffrence in there live I was always atracted to real estate, but never really had the education on how to get started. So make story short Thanks you
What kind of insurance are you getting? I think we are overpaying for the vacant home policy we’re getting at about $150/ month. Any suggestions would be appreciated.
Hi Sarah –
$150/month is about right for a builder’s risk policy that covers vacant houses…
We often don’t get vacant house insurance (and sometimes just get a landlord policy if our lender requires insurance), which is why our numbers are a good bit lower than you’d expect for insurance.
Who do you go through for your insurance? I flipped a house a couple years ago and had a hard time finding a local insurance company to give me insurance. I ended up finding someone that cost me $700 for a 1 year policy. They wouldn’t go any lower and I bought the house for about $70k. I ended up needing it because the house was broken into while I was gone on vacation and they caused about $8k in damage. What’s the difference in coverage between a landlord policy and a vacant house policy?
Matt –
A landlord policy will generally only protect you if the property is inhabited or has been within the past 30 days. This is often not the case for rehab properties and if you try to make a claim and can’t prove that the place was rented, your claim WILL get denied. What you want is a “builders risk” policy — these are insurance policies for vacant houses that are undergoing renovation, and these policies will pay out on a lot of things that can happen during a rehab.
In general, landlord policies are a lot cheaper than builders risk policies, but if you can’t afford to cover a large loss yourself during a rehab (major vandalism, major storm, fire, etc) it’s probably worth it.
For Builders Risk policies, check out Zurich Insurance, American Modern Insurance and Foremost Insurance. For landlord policies, I go with Allstate, but most insurance companies provide these, so choose whatever you use for your personal home and auto insurance.
Hey J
followed you here from bigger pockets & love the site!!
Not sure what kind of financing you are using(if any), but I didn’t see a down payment included w/ your costs and was wondering if you account for that.
Thanks again!
Hi George –
There are two reasons why I don’t include Downpayment in the Fixed Costs:
1. I consider Fixed Costs to be anything that doesn’t build direct equity in the property…in other words, they are the “cost of doing business”. Downpayment is equity that is immediately available to withdrawl through a sale or refi (unlike other fees, commissions and rehab costs);
2. In my Flip Formula, Downpayment is included in the Maximum Purchase Price (MPP) of the property, which makes it independent of the type of financing that is used. If it were also part of the Fixed Costs, it would be double-counted.
Hey J,
Like George above, I saw a post on Bigger Pockets and followed it to your website.
What a wealth of information you have here. Thanks for sharing and I hope we can compare notes on deals in the future.
To a great 2011!
Can you provide some insights re: portfolio lending in CA? Have you used any for your investments? Thank you!
Toni De Salvo
Hi,
I am working with you flip formula but the purchase cost fixed expenses are based on what you buy the house for. This conflicts with MPP, which you are trying to figure out. Do you already know what your fixed purchase costs are even without knowing what the MPP is?
Hi Paul –
Yes, you are correct — it will be impossible to determine *EXACTLY* what your purchase fixed costs are, since those depend on your MPP, which is what you’re trying to figure out. But, you should have an idea of what your MPP range will be, and based on that range, you should have a pretty good idea of what your purchase closing costs will be — certainly within a couple hundred dollars. So, my recommendation is to assume a worst-case amount of fixed costs for purchase (based on a relatively high MPP) and go from there. In realty, your fixed costs will then be a little bit lower than expected on the purchase side, which just makes the entire calculation a bit more conservative, which is good.
Kudos to you ! Wow, what a wealth of information ! i kept scrolling down the page to see “your special offer ” and was shocked to see that you are not selling some “top secret course”. Thank you once again. You are a credit to the industry !
J, I love your website, great info. I have a question for you regarding fixed cost.
I am looking at buying a house for $67,000, sale price about @ $109,000, rehab $12,000, Desired profit $12,000 – $15,000, basic fixed cost (similar to yours). My question is I will be borring 80% of loan from a bank and the rest will be coming from a friend (I will be paying the friend back w/ 10%). $67,000 + $12,000 = $79,000. My question is do I these numbers look right to you.
Hey Ron,
Those numbers do look like they work…you just want to be certain that your rehab estimate, your estimated sale price and your fixed costs are all accurate. But, assuming they are, you’re good to go.
So quick question. First off I am brand new at this but I am currently looking at a property that is going for 65,000. The sales price is 120,000, holding costs(fixed costs) are 12,000, desired profit is 15,000, which leaves a reno budget of 28,000. My question is if I am financing 100% of this flip do I pull out the loan for 105,000(purchase price, fixed costs and reno budget)?? Any help would be greatly appreciated.
Hey Derek –
I always like to get a loan for as much as I possibly can, but unless you’re working with a private lender, it’s unlikely you’ll be able to get a loan for 100% of the costs. Most lenders only like to fund 70-80% of the costs, unless you have a good bit of experience. But, if you can get the entire amount, go for it!
Keep in mind that some of that $12,000 in fixed costs will come out of the sale price at closing, so $105,000 is probably a little more than you’ll actually need. You’ll likely need the $65,000, the $28,000 and only part of the $12,000.
J Scott,
I’m in the process of working on my first deal and I want to be sure I have this ironed out correctly. My partner and I are trying to figure out exactly how much cash we need up front to get things going. Assuming the financing goes smoothly (which it never does), we will need 20% down and also the purchase costs (that you have listed above). Anything else that we may be missing? Thanks for the info.
Jake,
Sounds about right…
J,
Love what you’re doing, thanks for sharing your formulas and insights, very valuable. We’re doing something similar buying, rehabbing, and selling. My partner runs the office (I’m a hard money lender). He’s rehabbed 100 properties or so this year using investors and thus opening up how properties can be obtained such as through auction.
I’m wondering why you finance through an institution vs investors? Or do you do both? Everyone has their own logic and targeted method: cheaper to finance, larger profit vs quantity of deals, Faster is better. Can you comment in why you went with traditional financing and the associated fees route? Thanks for the wisdom!
Hi Tammy,
These days, we do a combination of self-financing (using our own cash) and working with private investors. We don’t do any institutional financing anymore. The reason we used to go that route is that we didn’t have as much experience as we do now, and finding private investors was more difficult. It’s not very difficult anymore…
I am sure i am not thinking about this correctly but why are you calculating your entire mortgage payment in your P&L? why would you not just use the interest portion of the mortgage payment? You end up getting the principle back after you sell?
PS Love you site and just ordered your book! thank you!
Chris – In this example, the monthly mortgage payments (the interest portion) is $500. If I assume I’ll hold the property for 5 months, that $2500 total in interest payments.
Thank you, Thank you, thank you. This information is so good!!! It is really simple and thorough.
such a informative post. Thankyou
J,
Thanks for this informative post.
Am just starting out. Can you be my mentor.
Thanks for very timely info. My wife and I are trying to get into our first deal and one item that was brought up was insurance to cover any contractors liability from injury etc. what have you done in that area?
Thanks,
Al and Marge
Hi Al,
I would recommend that you work primarily with contractors who carry their own liability and workers comp insurance. Especially for trades that have any non-trivial risk of injury (or doing damage). If you have to hire a trade without insurance, I recommend finding a good insurance agent to discuss carrying your own liability and workers comp. This isn’t a simple issue, and I’m not qualified to discuss all the details (don’t want to give any bad advice for your specific situation).
One thing I will suggest is getting an umbrella liability policy. These run about $250/year for $1M+ in coverage — a great deal in my opinion.
Excellent post and extremely helpful for us newbies, thank you.
Just curious. I see you are a firm believer in staging a home. But, I don’t see that anywhere in your breakdown. Do you stage your homes?
Hey Kevin –
We own all our own staging furniture, and stage our own houses.
Hey J,
Awesome information here, a sincere thank you. Quick question though. I noticed in your purchase cost you didn’t account for transfer tax. I’m in Pennsylvania, typically bitter parties 1% and seller pays 1% perhaps it’s just state by state but i’m curious to know if im missing something.
Thanks in advance
Tom Araujo
My apologies, “Buyer Pays”
Hey Thomas,
Not all states have transfer tax on real estate purchases/sales. Georgia (where most of our early projects were) is one of those states that does not have transfer taxes on sales. That said, many states do, and if you live in a state that does (I currently live in Maryland where we DO have it), don’t forget to account for it!