How are Fix n Flips profitable?

Question

I'm reading tons of threads and articles on Fix n Flips...I'm still not understanding the numbers.

Look, I like to keep things as simple as possible...I feel like, we as humans have a huge problem making things more complex than they need to be.

Let me give you a mock up example that I pulled from a fix n flip thread right here on BP...these are the end results:

" Sale Price=$265,000

Rehab Costs=$44,000

Closing Costs=$15,000

Holding Costs=$5,500

Purchase Price=$156,000

Net Profit=$44,500  "

This is one of many cases  I'm seeing around - I don't understand....if...u put in 66k...but profit 44.5k - it sounds to me like you just lost about 15k after all your hard work and efforts to flip the house.

I'm obviously missing something here and need to be educated. I read all these articles on how Fix n Flips can be lucrative over time once you get good/fast at it.....how, when all I see is..negative net profits.

Another quick example off the top of my head and leaving out all the additional costs... but... if u bought a home for 100k..put in 50k rehab... sold for 175k...your profit is 25k..but if u started with 50k u put in...ur now negative 25k. Right? or Wrong?

Or is THAT why you gotta do the math right first, to make sure that the property is worth investing in, in the first place.   Like it should be more... buy for 100k, put 20k in rehab... sell for 175k  and profit 55k.   Now your +35k from your original investment?

Sylvia B. · Answer

The ones that get me are the flippers on tv who buy a house for $1M and are so excited because they expect a profit of $50K. Waaaaay too much risk for the potential profit!

Blake Hrabal · Answer

@Steven Lowe thanks! i love how you applied the same principles to the math but used smaller numbers, that's great for any newbie.

Mark Cios · Answer

@Blake Hrabal haha was considering telling you to maybe take a step back and possible some accounting 101 classes. Had a feeling you were just having a brain fart though. To your other question, absolutely. If someone inherited their grandfathers house I needed to get rid of it that hour hah. I’m sure a deal like this is possible although very rare and you would need to know the right people. My numbers were for simplicity. Didn’t want to throw you off more with a sale price of like $166,573.83.

Steven Lowe · Answer

I buy a house for $10.

--My down payment is $2.

--The bank loans me $8.

--$2 + $8 = $10 purchase price

It costs me $2 to fix it up.

I sell it for $15.

It costs me $1 for closing costs, holding costs, interest, taxes, etc. (soft costs)

$15 sale price - $1 soft costs - $2 rehab cost - $10 purchase price (down payment + loan) = $2 left over

--I got the money back that I put into the deal ($2) PLUS I profited an extra $2

Jacob Sampson · Answer

$265k - $44k - $15k - $5.5k - $156k = $44.5k.

So they purchased for $156k spent $64.5k in purchase and rehab and then sold for $265k which returned to them their $64.5k invested and an additional $44.5k in profit.  They ended with $109k in cash.  But only the $44.5k is profit.  The $64.5k is their invested capitol returned to them.

In your second example you started with $50k and ended with $75k of which $25k was profit, but your sale price gave you your original 50k back on top of the profit you made.

Eli Schwartz · Answer

Hi @Blake Hrabal

Im not sure where you got the 66k from.

In the above example If you take

156k PP + 5.5k HC + 15k CC + 44k RC = $220,656

In other words your total investment cost all in is $220,656

Now you sell it for $265,000 thats a net profit of $44,344

Tom Shallcross · Answer

@Blake Hrabal - the net profit is after paying yourself back for the rehab.  Same if you invested in a stock.  If you invested 50k, it goes up, and you cash out at 70k, your profit is 20k (minus tax & fees).  You didn't lose money as you didn't go from 50k to 20k.  You made 20k on your original 50k investment.

Mark Cios · Answer

Say you start with $50,000 and want to purchase a $100,000 house.

Expense           Profit

Loan Amount                       $80,000

Downpayment                      $20,000

Renovation                          $25,000

Holding Costs                      $5,000

Sale Price                                                   $200,000

Total Profit                                                 $70,000

You sold the home for $200k, this pays the bank back the $80,000, pays you back the $20,000 downpayment that you invested, pays you back the $25,000 for renovations that you invested, covers the holding costs $5,000 that you invested and your left with $70,000 in profit. *Note* you already recovered your initial  investment of $50,000. You would be left with $130,000 in the bank now vs. the $50,000 your started out with.

Steven Lowe · Answer

Thanks.  Now I just need to go find a house for $10.  :)

The part where people get confused is the repayment of the original investment.  I suppose you could also look at it this way:

$15 sale price - $1 soft costs - $2 rehab cost - $8 bank loan = $4 gross profit

$4 gross profit - $2 original investment = $2 net profit

Blake Hrabal · Answer

@Mark Cios is it pretty common to be able to purchase a 100k property, add 25k in rehab and flip for 200k?  $70k profit seems too good to be true. I've been reading alot that 20-30k profit is average.

How are Fix n Flips profitable?

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