Since the housing market is steadily recovering, the return home is on the rise. Many people dream of building wealth by flipping houses, but it can be difficult. Tracking expenses and accounting for them is even more complicated, not to mention the tax laws that significantly complicate your decision-making process.
This article aims to provide a step-by-step guide on how to calculate operating costs when buying and flipping homes, so you have an idea of how it all fits together.
What are operational costs?
Operational costs are all the expenses associated with buying, repairing, owning and selling a property. They include purchase costs such as commissions and title insurance costs; repair costs, including cleaning and repairs; holding costs such as mortgage payments, taxes, insurance and private mortgage insurance; selling costs such as furniture or upgrades you add before putting it back on the market.
A step-by-step guide to accounting for operational costs
The process is not that complicated, but it definitely takes time. To make things easier, you can use house flip accounting software. These services will help you calculate operational costs with ease. Plus, I’ll give you a complete step-by-step example.
Home flipping involves careful planning, money management, and lots of paperwork. With that in mind, creating a formal budget can be helpful when it comes to buying your first investment property.
Buying costs include the money you give to an agent or real estate agent and their fees. You will also pay for your legal representation and any other permits that may be required. These are just a few expenses necessary to buy a house.
Commission – this is the fee charged by a real estate broker – usually paid by both the seller and the buyer but never by the property itself – and it is one of the most important costs associated with the purchase of a house (or several adjoining houses) to return. There are basically two types of agents a real estate flipper can deal with – full service brokers and discount brokers – and each type has its pros and cons.
Title insurance – this is a type of insurance that protects a home buyer against any claim that another party has title to the purchased property.
Pre-approval – getting pre-approved reduces the risk for buyers and sellers because they know that particular person can pay for the property and there is no need to wait for the approval process. This protects both parties against delays. As a homeowner, getting pre-approved is one of your first steps when looking for an investment property.
The cost of money
Money is always a big concern for new investors. Why should you worry about how much money it will cost to buy a house? The answer is simple – because there is no guarantee that you will make money on your investment property, no matter how much money you invest in it.
In fact, to save on taxes, many home pinball machines borrow as much money as possible when they get the capital needed to build equity. This means that they pay interest on their investment and pay off their debt at the same time. This is not an effective long-term strategy.
You should be aware of the cost of money. Interest isn’t just the price you pay to borrow money. There’s also an opportunity cost associated with it – in other words, if your money is tied up in one property, you can’t use it to invest elsewhere.
Since interest rates (or the cost of borrowed money) can change every day, it’s likely that even if you borrow a certain amount of money at any given time, the amount will be different when you decide to repay your debt.
Private Mortgage Insurance (PMI) – this type of insurance protects lenders against financial loss on loans that are too large for conventional coverage limits.
Holding costs include mortgage payments, taxes, insurance and private mortgage insurance (PMI), if applicable. It is important to note that in some parts of the country, property taxes are paid by the seller and included in the sale price of the house.
Selling costs include any improvements you make to the property before putting it back on the market. These one-time costs can really make a difference in your overall profit margin.
In order to make a profit, a house pinball machine typically seeks a return of at least 20% – and that means simply breaking even financially is not acceptable. In other words, if you spent $10,000 on renovations and repairs, expect to see at least $20,000 profit from the sale.
put it all together
Now that you know all about calculating operational costs when buying/selling a home, there is only one last step: putting everything together. You need to make sure you have enough capital to cover purchase and operating costs, with some money left over for repairs that aren’t part of the original plan.
To do this, you can use internal accounting software. Start by listing all the expenses: commissions (real estate brokerage fees) + title insurance + pre-approval + mortgage loan fees (including private mortgage insurance payments).
Then, list all your one-time expenses: repairs (renovation of the floor, kitchen and bathroom, electrical work) + expenses for installations and furniture.
Revenue is what you earn when selling a property after taking operating costs into account. It is also known as income or profit.
Each house flipper has its own way of calculating return on investment. This can be based on a number of factors, but one factor may be how long it takes to sell a property. The faster you find a buyer, the more profit you have to make. However, it’s not just about the money.
You should also view home flipping as an opportunity to learn new skills that will allow you to have extra money available for your personal or professional life in the future. I hope this article has given you a lot of information on how to account for operational costs during a house flip.
This article does not necessarily reflect the views of the editors or management of EconoTimes