How Much Profit Should You Make on Each Real Estate Deal?

Today we’re talking about how much profit you should make on every single deal.

So, guys, I remember a conversation around two or three years ago at a real estate conference in California. It was with a fellow turnkey company owner, one of the best. And, I was complaining because a lot of investors ask me how much money we make on every single deal. That would frustrate me and piss me off because I always thought, “Why do you care how much money I make?”

The person I was talking to said I should just say as much as you possibly can. That really rang true because the more money we make as a company, the better off we are and the more people we can employ and better service we can deliver. The last thing you would want as an investor is if you’re buying turnkey property or looking to bring on a property management company to assist you is for them not to do well. You want them to do well, make money and make a profit so they stay in business for many years.

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If they’re out of business and can’t cover costs, or even make a bit of money, you’re going have to find someone else to do it for you. It’s not that easy to find another company or another provider to look after you the same way that someone else is that you’ve already established that long-term relationship with.

How Much Profit Should You Make on Every Deal?

So something I’m going to do today is tell you how much profit we make on every single deal, as well as how much profit you should make on every single deal. Our market, here in Toledo, Ohio, is different than a lot of other markets out there. Our business is different from a lot of individuals out there and a lot of other companies. So there’s no real rule of thumb. I’m just going to give you what we do, how much we make and how much profit you should make on every deal.

Here in Toledo, Ohio, we do five to 10 deals per month. We are very selective with the properties that we buy and we intentionally limit ourselves to the number of properties we buy. We’ve always believed in having a small, but great business. Rather than a big and just good business. All of this enables us to be picky and choosy with what we buy and how much we spend and we like to buy in bulk so we can get a lot of discounts.

There are a lot of different ways we go about our acquisitions. I always like to tell investors to leave no stone unturned when it comes to acquisitions. So we do a lot of yellow letter campaigns, we stock Craigslist frequently, we always post on Facebook, we work with a lot of bird dogs and wholesalers, auction websites, and the MLS. Any means necessary we’re always looking for deals.

We usually buy properties in solid B-class areas that cost anywhere from $20,000 to $30,000. Depending on the deal we always want to buy properties that do not need too much work so we can be in and out as quickly as possible. We like to do two to three-week rehabs and that’s why we’re so selective in our acquisition process.

The rehabs would be anywhere from $5,000 to $15,000. So let’s just say we’re into a house for around $30,000 to $35,000—that’s kind of where we want to be. Then we look at selling the properties anywhere from $55,000 to $65,000. That would be a $20,000 to $25,000 gross profit per deal. Keep in mind, we run a turnkey company with a pretty large operation. We have staff and in-house property management.

We’re pretty much a one-stop shop. There’s a lot of mouths that we need to feed so when everything is said and done at the end of the year we want to be at a $5,000 to $10,000 net profit per deal. That’s after you take all company costs into consideration. So, that’s us and what we do. If you think we’re making too much then good for you because I don’t want to work with you. Why? Because the price is what you pay and value is what you get and I think that we offer a lot of value from a turnkey company.

Now, for all of you investors out there that are looking to buy, fix and flip several properties you can do really well in the Midwest. I think the Midwest is a great place to invest when it comes to profit margins and low-cost entry. There are still people that want to live here and still desirability. There’s still great schools, infrastructure, and jobs. It’s a great market to make money. East coast and west coast are too expensive. I wouldn’t do, honestly. I would move the Midwest and I would flip. That is why I tell everyone to save $50,000 to $100,000 before you start because in the Midwest that can take you a long way.

Anyway, let me get to the numbers. If you’re not making a 30 percent net profit margin, I would not get out of bed. So for all of you guys and girls out there that are looking to buy, fix and flip you should be making a 30 percent net profit.

Let me give you an example. You buy a property for $50,000 and you have a $30,000 rehab. That puts you in at $80,000. You’re asking price should be $139,000, someone offers $135,000, and closing costs are $10,000. That puts you at $125,000. You’re into it for $80,000 with a $45,000 profit margin—that’s over 30 percent. Those are some sexy numbers in my opinion.

So if you’re investing $80,000 into the deal and you’re walking away with $125,000 which is a $45,000 net profit margin, those are good numbers. I guess I wouldn’t settle for anything less than $25,000. I think a $25,000 profit margin will put you exactly at a 30 percent profit—that’s off the top of my head so forgive me if I’m off. Ultimately, whatever you are investing or whatever your costs are going to be including purchase and acquisition, you should be making a 30 percent profit margin.

I’m going to leave you with one final thought. That is you make money when you buy and not when you sell. So it’s very important that you buy cheap, negotiate hard, and don’t buy the deal unless the numbers make sense.

Lose the deal over $100. I’ve lost so many deals over $100, but it doesn’t matter; it’s out of principle. Stick to your beliefs and buy the property for whatever you need to buy it for in order to make that 30 percent profit margin. Then rinse and repeat. Build up your lump sum cash and then maybe you can buy, fix, and hold a property, because ultimately it is about cash flow because cash flow is what will give you financial freedom.

So that’s it, guys. That is how much profit that I think you should make on every single deal. That’s how much profit we make. I’ve never revealed this before so there you have it.

What’s the best deal you’ve ever done? How much profit do you make?

I’d love to hear from you in a comment below!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.