What Does It Really Cost to Flip a House?

Flipping a house costs far more than the purchase price plus the renovation budget. Between the two ends of the deal sit acquisition costs, financing costs, holding costs, and selling costs, and in the worked example below those add up to about 15 percent of the after-repair value.

That is the number that separates flippers who make money from flippers who are surprised at the closing table. The rehab budget is the part everyone plans carefully. The other 15 percent is the part that quietly eats the profit.

What are the five cost buckets?

Notice that three of the five scale with time or with the sale price rather than with the scope of work. That is why a flip that goes well on construction can still go badly on the numbers.

A worked example (illustrative only)

These figures are invented to show how the arithmetic runs. They are not a projection for any real property or market.

A flipper buys at $245,000, budgets $62,000 of renovation, and expects an after-repair value of $385,000. Financing is a $270,250 hard money loan at 11 percent interest-only with 2 points, and the plan is a 6-month hold.

Everything outside of purchase and rehab comes to $57,010, which is 14.8 percent of the after-repair value. The gross spread between the $245,000 purchase and the $385,000 exit was $140,000. After rehab and the other five buckets, roughly $21,000 of it survives.

Cash required, before any rehab float, runs about $36,750 for the down payment plus $5,405 in points, $3,675 in acquisition closing costs, $4,655 in holding costs, and $13,200 in interest, or roughly $63,700. The $20,990 profit on that capital over six months is a real return, but it is a much narrower outcome than the headline spread suggested.

What breaks a flip?

Each of these changes exactly one variable in the example above, holding everything else constant.

The first row is the one worth staring at. A 6.5 percent miss on the after-repair value, which is a completely ordinary amount of valuation error, turns a $21,000 profit into a small loss. Note that selling costs fall with the lower price and it still goes negative, because commissions and concessions shrink proportionally while every other cost stays fixed.

This is why the exit value estimate deserves more scrutiny than any other input in a flip. Rehab overruns hurt. A bad ARV kills.

Why the 70% rule exists

The common rule of thumb says maximum offer equals 70 percent of ARV minus rehab. In this example that would be 70 percent of $385,000, which is $269,500, minus $62,000 of rehab, giving a maximum offer of $207,500.

The flipper in the example paid $245,000, or $37,500 above the 70 percent line. That single decision explains most of the thin margin. The 30 percent gap in the rule is not profit, it is the reserve that absorbs financing, holding, selling costs, and error, and it is meant to leave a profit after all of it.

The rule is crude and the right percentage shifts with market and hold length. But the structure is sound: work backward from the exit, subtract the work, subtract a real allowance for everything else, and what remains is your offer.

Where flippers underestimate

• •Interest is charged on the draw balance over time, not the loan amount up front. But it accrues every day the project runs long, and points are paid regardless of how fast you finish.
• •Selling costs are calculated on the sale price, not the profit. A higher exit raises them proportionally, which is why the gain from selling $15,000 higher is not $15,000.
• •Concessions have become part of the price. Budgeting zero for buyer credits is optimistic in most markets.
• •Vacant property insurance costs more than a homeowner's policy. A standard policy may not even cover a vacant home under renovation.
• •Utilities have to be on. Contractors need power and water, and the meter runs the entire hold.
• •Contingency is not padding. Ten to fifteen percent on the rehab budget is a line item, not optimism, especially on anything involving an older roof, foundation, or electrical panel.

Getting the two big inputs right

A flip model rests on two numbers: the after-repair value and the rehab cost. Everything else in the spreadsheet is arithmetic around them.

For the rehab side, price the actual scope rather than applying a dollar-per-square-foot rule to the whole house. The rehab cost estimator breaks it into components so the number is built rather than guessed.

For the exit value, look at the comparable sales behind the estimate, not just the estimate. Check that the comps are renovated properties in the same submarket, since a fixer comp does not support an after-renovation exit. The ARV calculator works from visible, adjustable comps, and Resideline estimates condition from listing photos to separate as-is value from after-repair value. That is an estimate rather than an inspection, and it should be treated that way. Estimates are frozen when a property lists and then graded against the real closing price, with the results published on a public accuracy dashboard.

Then run the whole deal, including holding and selling costs, in the deal analyzer, and check your closing-side assumptions with the closing costs calculator.

The cost of flipping a house is not the purchase price plus the rehab. It is the purchase price, plus the rehab, plus roughly 15 percent of the exit value in costs that never touch a single wall. Model all of it before you make the offer, because after you own it, the only variable left is time, and time only makes the number worse.