Accounting For House Flippers: How To Account For Operational Costs

Since the housing market is steadily recovering, home flipping is on the rise. Many people dream of building wealth by flipping houses, but it can be difficult. Keeping track of the expenses and accounting for them is even more complicated, not to mention the tax laws that drastically complicate your decision-making process.

This article aims to provide a step-by-step guide for how to calculate operating costs when buying and flipping homes, so you get an idea of how it all comes together.

What Are Operational Costs?

Operational costs are all the expenses associated with buying, repairing, holding, and selling a property. They include buying costs such as commissions and title insurance fees; repair costs including cleaning and repairs; holding costs such as mortgage payments, taxes, insurances, and private mortgage insurance; selling costs such as any furnishings or upgrades you add before putting it back on the market.

A Step-By-Step Guide To Account For Operational Costs

The process is not that complicated, but it is definitely time-consuming. To make things easier, you can use house flipping accounting software. These services will help you calculate operational costs with no fuss. Additionally, I will give you a full example, step by step.

Buying Costs

Home flipping involves careful planning, money management, and lots of paperwork. With this in mind, it can be helpful to create a formal budget when it comes to buying your first investment property.

Buying costs include the money you give an agent or realtor and their fees. You will also pay for your legal representation and any other permits that may be required. These are only some expenses that are necessary to buy a house.

• Commission – it is the fee charged by a real estate broker - usually paid by both the seller and buyer but never by the property itself - and is one of the biggest costs associated with buying a house (or several contiguous houses) to flip. There are essentially two kinds of agents that a house flipper can deal with - full service and discount brokerages - and each type has its pros and cons.

• Title Insurance – it is a type of insurance that protects the buyer of a house against any claims that another party has an ownership interest in the property being purchased.

• Pre-Approval – getting pre-approval reduces the risk to both buyers and sellers because they know that this particular person can pay for the property, and there's no need to wait for the approval process. This protects both parties from delays. As a house flipper, getting pre-approval 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 be worried about how much money it will cost you to buy a house? The answer is simple – because there aren't any guarantees that you'll make money on your investment property, no matter how much money you put into it.

In fact, to save on taxes, many home flippers borrow as much money as possible when they get the necessary capital to build up equity. This means that they pay interest on their investment and are paying off their debt at the same time. It's not an effective long-term strategy.

You should be aware of the cost of money. Interest is not just the price you pay for borrowing money. There is an opportunity cost associated with it, too – in other words, if your money is tied up in a 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 one point in time, the amount will differ when you decide to pay back 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

Holding costs include mortgage payments, taxes, insurances, 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 house's selling price.

Selling Costs

Selling costs include any upgrades 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 flipper is usually looking for at least a 20 percent return – and that means that just 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 in profit when selling.

Putting It All Together

Now that you know all about calculating operational costs when buying/selling homes, there's only one last step: putting it all together. You need to make sure that you have enough capital to cover buying and operating costs, with some money left over for repairs that are not part of the initial plan.

To do this, you can use house flipping accounting software. Start by listing all the expenses: commissions (real estate broker fees) + title insurance + pre-approval + mortgage loan costs (including Private Mortgage Insurance payments).

Then list all your one-time expenses: repairs (flooring, kitchen, and bathroom remodeling, electrical work) + fixtures and furniture expenses.

Revenue is what you earn when selling a property after accounting for operational costs. It is also known as income or profit.

The Bottom Line

Every house flipper has its own way of calculating the ROI. It can be based on a number of factors, but one factor can be the time it takes to sell a property. The quicker you find a buyer, the more profit you have to work with. However, it is not just about money.

You should also consider home flipping as an opportunity to learn new skills that will allow you to have some extra money available for your personal life or business in the future. I hope this article gave you vast information about how to account for operational costs while house flipping.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes