For real estate investors who are building up to do their first rehab projects, don’t forget to add up all of the costs before you calculate your profits. Too often, the classes that teach you how to make money “flipping properties,” neglect to tell you about ALL of the costs involved in a rehab project:
- Realtor Commissions: Because the seller typically pays the realtor commissions, this could be the largest chunk out of your profit on the backend of your transaction.
- Lender Interest and Fees: If you’re using a hard money lender to finance your rehab project, make sure you calculate all of the loan fees, also called points, any junk fees, and finally all of the possible interest you may pay. For example, if you think you’ll have a project out for 6 months from start to finish, calculate the interest payments you’ll pay to your hard money lender for those six months and take this amount out of the profit. Also subtract the total amount of your fees, including junk fees, such as government recording fees, document preparation, wire transfer fees, etc.
Insurance: Don’t forget about paying for title insurance and for hazard insurance! On the front side of the transaction and on the backside, someone will be paying for Title insurance. Don’t forget to take this cost out of your final profit. Also consider the cost of hazard insurance for the time you’ll have the project out, and take that cost out of your final profit as well.