Written by Elma Steven | Updated on January, 2024
The real estate market is rife with opportunities for profit, and one strategy that has garnered significant attention over the years is house flipping. This involves buying a property at a lower price, making necessary improvements, and then selling it at a higher price. But how profitable is this venture in reality? To understand this, let’s break down the financial components: Revenue, Cost of Goods Sold (COGS), and Operating Expenses.
Revenue
For a house flipping business, the revenue typically comes from the sales of flipped properties. Here’s a hypothetical table to demonstrate this:
Cost of Goods Sold
In the context of house flipping, the Cost of Goods Sold (COGS) would primarily consist of the purchase price of the houses and the costs associated with renovating them. Here’s a hypothetical table demonstrating this:
Again, these figures are illustrative. Actual costs can vary based on the property’s condition, the extent of renovations needed, and the market price of properties in the area.
Operating Expenses
Operating expenses in a house flipping business would encompass various overhead costs such as property inspection fees, legal fees, real estate agent commissions, utilities, insurance, taxes, and more. Here’s a hypothetical breakdown for operating expenses based on our three flipped houses:
The net profit (or loss) is determined by taking the total revenue and subtracting the combined total of the cost of goods sold (COGS) and the operating expenses.
Here’s a breakdown based on our previous figures:
Total Revenue: $705,000 (from our previous discussion)
Total COGS: $555,000 (from our previous discussion)
Total Operating Expenses: $66,250 (from our previous discussion)
To calculate the net profit:
Net Profit = Total Revenue – (Total COGS + Total Operating Expenses)
Net Profit = $705,000 – ($555,000 + $66,250)
Net Profit = $705,000 – $621,250
Net Profit: $83,750
Based on our hypothetical figures, the house flipping business would have made a net profit of $83,750 from flipping three houses.