Sunk Cost

What is Sunk Cost in real estate?

In the context of real estate investing, and in particular mid-construction projects often involving a fix and flip loan, sunk cost refers to the money, time, or resources that have already been invested into a property or project and cannot be recovered, regardless of whether the project is completed or abandoned.

For a fix and flip project—where an investor purchases a property, renovates it, and sells it for a profit—sunk costs typically arise when construction or renovations are already underway, and additional financing or decisions need to be made. The lender will want to understand the sunk costs already incurred by the borrower in determining loan approval and loan terms.

Some lenders and investors will also refer to your completed rehab budget as your sunk costs. This is typically required and reviewed during underwriting for no seasoning cash out refi and delayed purchase financings. If you're using the BRRRR method, you will become very familiar with sunk costs, and the importance of documenting them to optimize your refinance.

Sunk Cost Examples

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