Stock photo licensed from iStockphoto.com

The Hidden Costs of Flipping

Posted January 16th, 2013 under pitfalls, renovations and repairs.

So, you're thinking about Flipping a property for a profit? Before you jump in, make sure you've thought through all the costs involved. You'll need to pay for much more than just the renovations, and the venture might not be as profitable as you expect.

First, there are the costs associated with purchasing the property. You'll need to pay land transfer tax, legal fees, and arrange for a mortgage loan.

Second, there are the costs of renovating. Obviously, there are materials and labour (and hopefully you aren't making the rookie accounting mistake of valuing your own labour at $0). You should also include a buffer for unexpected repairs, since every home has some that need to be attended to.

But you'll also need insurance during the renovation period, and you'll have to pay the carrying costs of the mortgage, utility bills, and property taxes all the way through to the closing date of your sale.

Third comes the costs to sell the property, which includes commission (assuming you use a real estate agent, or you can substitute the cost of advertising and your own time), and again legal fees.

Finally (no, we're not done yet!) you need to remember that your profit is subject to capital gains tax, since the property is not your personal residence.

In Summary

If you want to flip a property, it's best to sit down and make a detailed budget, and keep in mind that there are no guarantees on the time required for the renovations or to sell the property. The market may shift while you're renovating, changing your expected selling price.

This is why many flips are done by real estate agents: aside from their knowledge of the market, they're also able to use their own commission as a buffer.

Want to know more about flipping a property? Just ask me, I'll be happy to help.

--Peter

Get monthly real estate advice in your inbox, free! privacy policy