Costs To Consider When Flipping A House
It’s easy to get caught up in the moment of spotting what looks like a good deal on a property. Keep yourself in check before you make any final decisions though. At least until you’ve done all the financials. Use this helpful guide for the different costs to consider when flipping a house.
And remember – “Fools rush in where angels fear to tread.” – Alexander Pope
There’s nothing more dangerous to would-be property developers than a “back of fag packet” calculation. Well, maybe there are some more dangerous things – but hopefully you get the point I’m trying to make!
How many times have you had the conversation with yourself that goes something along the lines of….
“right, this house is up for sale for 160K, I reckon I could probably get it for £150k, spend about £15k doing it up and probably sell for £200k…. That’s £35k profit for 6 months work.”
Come on, be honest….
Well, As attractive as that sounds – it becomes a lot less attractive when you start factoring in all the other additional costs that are involved in flipping a house. But don’t worry – that’s why I’m here. To give you a list of other financials you should bear in mind when weighing up your investment decisions.
To explain – let’s use the above example as a bit of a working case study.
The Deal At First Glance
|Item Description:||Financials: (£)|
|Cost Of Purchase:||£150,000|
As The Story Unfolds…
Legal Fees (Purchase)
Ok, so you’ve made the offer and it’s been accepted by the vendor, £150,000. In order to secure the property, you’re going to have to pay a Solicitor for their legal fees. For this example, let’s say you can get that for £1000.
Finance Fees (Broker)
Unfortunately in your current situation, you haven’t got the required funds to make a cash purchase on the property. Like many investors – you’re using a bridging loan as short term finance in order to complete. You go to your trusted broker for this – £500.
So in this scenario, you’re a property investor who’s buying an additional property. So you are subject to the 3% surcharge for investors. As this article is written, we’re in a stamp duty ‘holiday’ resulting from the effects of COVID-19. So you get a discount here, congratulations! But the bill due is still £4,500.
Uh-oh, your Jigsaw has decided to stop working mid-way through doing up your kitchen, That’s gonna cost you another £100 to replace. On top of that, you ran into some additional costs you didn’t factor in to replace some blown glass in the upstairs windows – £500.
Running Costs (6 Months)
So you’ve got the house and you’re doing it up. You already know it’s going to take you about 6 months to complete the works. During this time you’ve got to factor in the running costs for the property – that’s water, electricity, gas and council tax bills. £1200
Staging Costs (For Sale)
This one is optional, but I would personally recommend it to give a place a more “homely” feel when people look around. It makes it easier for people to picture themselves in a place which looks like a home already rather than all empty rooms. So, to do this – you spend a bit of time hunting around on Gumtree and buy some furniture to stage the house – £1,500.
Finance Fees (Interest)
Remember that bridging loan you took at the the beginning of the process? Well, it becomes due at the end of your term. The deal you took out was a 0.75% PCM against a loan value of £112,500. So your total interest bill at the end is £5,062.50
Estate Agents Fees (Selling)
Right, the house is ready to go on the market now. That’s gonna cost you £1,800 to list it with an estate agent.
Sorry to be the bearer of bad news, but the house you’ve put so much time and effort into has taken a month longer than expected to sell. That means you’ve got to pay another month’s worth of your bridging loan, as well as an additional months worth of running costs – all in bill = £1,043.75
Legal Fees (Selling)
Remember, you will have to pay legal fees when you sell too – another £1000.
The Deal Once You’ve Factored In All The Costs
|Item Description:||Financials: (£)|
|Cost Of Purchase||£150,000|
|Legal Fees (Purchase)||£1,000|
|Finance Cost (Broker)||£500|
|Running Costs (6 Months)||£1,200|
|Finance Fees (Interest)||£5,062.50|
|Estate Agent Fees (Selling)||£1,800|
|Holding Costs (1 Month)||£1,043.75|
|Legal Fees (Selling)||£1,000|
Suddenly, that original £35k profit has over halved once you’ve factored in all the additional costs. The question is – is the deal still as attractive as it looked in the first place?
Before you jump into any buying decisions – do the maths.
(Note – the figures in this article are indicative, get some quotes!)
And Don’t Forget Your Taxes!
So now you know nearly all the costs to consider when flipping a house… Once you’ve sold the property, there’s just one more to think about. You’ll have taxes to pay. What sort of tax you pay very much depends on what structure you use to operate your property activities. Expect to pay between 20-40% of your profits back to HMRC. See my article on property tax for beginners for more info.