where is your break point for a flip.

Question

I have seen some posts where people quote a 1% per month return on rentals or something like that. If you are a flipper or rehabber, at what point do you decide well maybe this property is better suited for flip, rental, or simply abandon ship!

Is there a % that you look for from the purchase price to decide.

Thanks :D :roll:

Is there a % that you look for from the purchase price to decide.

Thanks :D  :roll:

Will Barnard · Answer

A very old thread that needs this revival.

70% rule for flippers is a great rule of thumb, keeping in mind it is a "guideline" and quick evaluation tool only, not an end all, be all "rule".

That said, you must adjust depending on certain cirumstances such as price points. With a $25k acquisition and $10k rehab, you have invested $35k. If the ARV is $50k (70%), I would not consider this a good deal as the total profit margin before taxes and with NO mistakes is only $15k.
What if the rehab ended up at $15k, no buyers made offers for 2 months, and you had to lower ask price to $45k. You now have only a $5k profit less more holding costs!
Just the opposite, with a purchase at $300k and a rehab at $50k, your investment is $350k. If the resale is $500k (70%), then your profit margin without any mistakes is $150k! That leaves a ton of room for mistakes, market corrections, etc. as well as more room to add debt financing and other higher holding cost factors.

In todays tighter rehab spread market (at least here in CA) a good deal is at 75% and I have even done them as high as 80% but only when I was 100% confident of a first week full price offer on the re-sell, and the rehab was very light and very quick.
Example, late last year, I paid $305k for a property that took me only $8k to rehab and it only took 10 days. It was back on the market and sold for full price at $389k with nothing back to buyer in first week of listing. My total hold time was only 63 days! (would have been quicker but buyer's lender was late to close) After all costs, including private lending costs, I pocketed over $35k. Not bad for only 63 days and 10 days of actual work at job site. Even better, I only needed $75k of my own cash to do this deal and as such, made a ROI of 46.6% in 2 months which is an annual return on MY cash of 280%!!!

Ryan Webber · Answer

Ahhh, well its a number that factors in enough mistakes for a newbie to breakeven and an expert to make roughly 15%+ profit.  Here' s a breakdown of the percentages behind those numbers:

http://forums.biggerpockets.com/viewtopic.php?p=18225&highlight=#18225

For years I factored straight numbers backwards to figure my rehabs.  Then I had a stroke of genius and came up with a percentage of ARV that I could quickly factor for the typical costs.  I then just subtracted my remodeling costs and my desired profit and I had my maximum offer.  Later on I met another investor on another forum that quoted the 70% of ARV formula and it magically matched up to my masterfully created percentages.  So much for inventing something new. :roll:   Since then I've just used the 70% rule.  Its simpler and easier to factor.

Richard Warren · Answer

The above equation does account for buying , selling and holding costs.  If you anticipate a long hold for any reason, say more than 4 months from purchase to sale, thenyou have to adjust your numbers.  If your buying/selling financining and holding costs are 15-20% that allows for a 10-15% profit.  The formula is just a starting point and prevents you from making a major mistake by paying too much for a property.

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Robin Vidovich · Answer

20% Profit
10% holding and closing costs
70% of  ARV

Added together equals your property at 100% of ARV.
Now, the 10% does not factor in a longer holding cost for a property being on the market a long time or for extended rehab time.

rdinvestors

Willis Seng · Answer

comparable sales meaning houses sold within the neighborhood?

Will Barnard · Answer

Yes, I always use private lending combined with my capital to ensure LTV is safe for lenders. Doing what is right for you is up to you and only you can decide that. Leverage used wisely is a benefit, leverage used irresponsibly is a huge negative. (to state the obvious)

Dee Brock · Answer

@Will Barnard

Do you always use private lending? Or have you gotten to the point where you put up your own money. I am trying to decide do I want to use my own money or use a HML? What's your experience tell you?

Dee Brock

Jim Gordon · Answer

Comparable sales

Account Closed · Answer

Flips mean different things to people.

If you find a hot deal and you lock it down you might have it sold later that day. How much do you need to collect to make it a good deal for all?

Remember you want to keep the people you are selling to happy if they are investors as they might come back for more.

If you are flipping before taking title and have no closing costs then you can work on a thinner margin assuming you get the deals done. If you are buying and then hoping to sell after taking title you likely have more costs so need more of a margin.

What does then to happen is someone finding a solid deal but they want to milk it for everything it is worth. They squeeze so hard that the deal breaks down. Make a profit but focus on doing multiple deals rather than making a year's income on each deal.

John Corey

where is your break point for a flip.

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