Fix And Flip

· 2 min read
Fix and flip is buying a distressed property, renovating it, and selling it for a profit — usually within 3-6 months, and it’s the most…

Fix and flip is buying a distressed property, renovating it, and selling it for a profit — usually within 3-6 months, and it’s the most visible (and most romanticized) real estate investing strategy out there.

The formula is simple: buy low, add value through renovation, sell high. The execution is anything but simple. Between unexpected structural issues, contractor delays, holding costs, and market timing, there are a dozen ways a flip can go from profitable to painful.

The Numbers Behind a Flip

Experienced flippers follow the 70% rule: never pay more than 70% of the after-repair value (ARV) minus repair costs.

If a house will be worth $300,000 after renovation and needs $40,000 in work: $300,000 x 70% = $210,000 – $40,000 = $170,000 maximum purchase price. That leaves roughly $50,000 for profit, closing costs, holding costs, and a margin of error.

On a typical flip:

  • Purchase: $170,000
  • Renovation: $40,000
  • Holding costs (4 months): $8,000 (loan payments, taxes, insurance, utilities)
  • Selling costs (6% commission + closing): $21,000
  • Total cost: $239,000
  • Sale price: $300,000
  • Profit: $61,000

Financing Flips

Most flippers use hard money loans — short-term loans at 10-14% interest with 2-4 points upfront. These loans close fast (7-14 days) and are based on the property’s value, not your income. They’re expensive, but the speed and flexibility justify the cost on a 4-month project.

A typical hard money deal: 85% of purchase price plus 100% of rehab costs, funded in draws as work is completed. You bring 15% of the purchase price plus points and fees.

What Makes or Breaks a Flip

Buying right is 80% of the game. You make money on the purchase, not the sale. Pay too much and no amount of renovation genius saves the deal.

Speed is the other factor. Every month you hold the property costs money — loan interest, insurance, taxes, utilities, lawn care. A flip that takes 8 months instead of 4 can easily eat $10,000-$20,000 in extra holding costs.

Tax Implications

Flip profits are taxed as ordinary income, not capital gains. If you’re in the 24% tax bracket, Uncle Sam takes roughly a quarter of your profit. Frequent flippers may also owe self-employment tax. This is a significant bite — a $60,000 profit might net only $40,000-$45,000 after taxes.

Estimate renovation returns with our renovation ROI calculator, model financing with the mortgage calculator, and find more investing terms in the glossary.