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Updated about 8 years ago, 10/05/2016
First Time Flip ROI
I know this is going to be different for everyone, but what's a good ballpark ROI to aim for for my first flip? I'm analyzing some deals right now and trying to figure out what a realistic range is. I'm assuming that for a very first flip, I should aim a little lower, and work my way up to better returns as I gain experience?
Not sure if there's any set standard for ROI. I don't think you should box yourself in regarding it though, however I think working up several possibilities should be done. I have seen guys have extremely great ROIs and I've seen some moderate to low ROIs. I would say look at a possible high mark and then look at what you think would be a low mark but still satisfactory to you. I know you are doing your due diligence but just think boxing yourself is not the way to go. You may actually surprise yourself when all's said and done. Just my cents.
Originally posted by @Dana Whicker:
On your first flip a profit of $1 or more is a good result. I'm not kidding.
LOL!! Then if you factor in the time and effort, that'd equate to a major loss! =P
Originally posted by @Stacy Weng:
Originally posted by @Dana Whicker:
On your first flip a profit of $1 or more is a good result. I'm not kidding.
LOL!! Then if you factor in the time and effort, that'd equate to a major loss! =P
I would imagine that the lessons learned would be incredibly valuable, so I wouldnt necessarily look at it as a major loss. More like an investment in your education on the subject. I would still believe this even if you actually had a major loss.
Originally posted by @Alfie Bartley:
Not sure if there's any set standard for ROI. I don't think you should box yourself in regarding it though, however I think working up several possibilities should be done. I have seen guys have extremely great ROIs and I've seen some moderate to low ROIs. I would say look at a possible high mark and then look at what you think would be a low mark but still satisfactory to you. I know you are doing your due diligence but just think boxing yourself is not the way to go. You may actually surprise yourself when all's said and done. Just my cents.
I'd agree with that! Obviously I'd like to aim high, but I don't want to be unrealistic either for just starting out. And from an investment perspective, at what point / ROI would the deal just not be worth pursuing anymore?
Originally posted by @Dennis Mejillones:
Originally posted by @Stacy Weng:
Originally posted by @Dana Whicker:
On your first flip a profit of $1 or more is a good result. I'm not kidding.
LOL!! Then if you factor in the time and effort, that'd equate to a major loss! =P
I would imagine that the lessons learned would be incredibly valuable, so I wouldnt necessarily look at it as a major loss. More like an investment in your education on the subject. I would still believe this even if you actually had a major loss.
Very valid point!
@Stacy Weng of course you should be concerned with your ROI, however it can be difficult to accurately project these metrics in the beginning. There are so many factors that generally you only get a feel for after a few deals (i.e. rehab costs, whether an appraisal is accurate, neighborhood comps and how they relate to your project, etc.). My first flip yielded just over 15% ROI; I still think that turned out great for my first time even though I shy away from anything that low these days.
The point is @Alfie Bartley, has it right. Do your due diligence and crunch the numbers, but don't box yourself into a strict ROI just yet. You need a few deals under your belt to start to see past the calculators to real/true values.
Originally posted by @Andrew Campbell:
@Stacy Weng of course you should be concerned with your ROI, however it can be difficult to accurately project these metrics in the beginning. There are so many factors that generally you only get a feel for after a few deals (i.e. rehab costs, whether an appraisal is accurate, neighborhood comps and how they relate to your project, etc.). My first flip yielded just over 15% ROI; I still think that turned out great for my first time even though I shy away from anything that low these days.
The point is @Alfie Bartley, has it right. Do your due diligence and crunch the numbers, but don't box yourself into a strict ROI just yet. You need a few deals under your belt to start to see past the calculators to real/true values.
On a similar note, would that same concept apply to how often and strictly you follow the 70% ARV rule? While the 70% ARV seems like a great general guideline to follow, I've found it very difficult to get deals that fall under that rule in ultra competitive markets. Does it make sense to be flexible with it, or is that just opening myself up to potential problems?
Personally, I would talk to other investors in your area, get a good ball park figure of what the returns are flipping in your area of interests. A rough number around that mark would be a good start and from there you can decide if the returns from flipping warrants your time, risks and effort. Of course, if you can do more, kudos to you.
Keep in mind as well, flipping numbers are dynamic. In my market, the flipping yields have fallen considerably over the last 2 years due to the increase in property values. So in time to come, you'll probably need to amend to opening that number. If your market is hot the ROI can change very very quickly.
@Stacy Weng Yes! That same concept applies as well. The ROI might be good enough where following the 70% might actually hamper the deal being success. You might be at 65%, 60% or even 55% but if the ROI is still great then you should have no problem.
A majority of the time you'll want to be at 70% because it's a tried and true calculation, but as with everything in life, adjustments will need to be made. Just be sure to do your homework and look at it from several possibilities.
I always aim to profit at least $100k when all said and done. That gives me enough wiggle room if I go over budget or I have to do a price reduction if the market changes. Some other good rules to follow is to not buy on any busy roads, etc.. concentrate on prime areas you and you should be fine.
Thanks @CK Hwang, appreciate the advice and insight!
@Alfie Bartley, maybe I'm misunderstanding, but wouldn't an ARV of 55/60/65% be even better than 70% where it'd be a no brainer at that point?
@Kris Swierz, is your $100K profit after all fees (closing costs, real estate agent commission, holding costs, etc.)? While that's an awesome profit from a single flip, I'd think that'd be hard to achieve on a regular basis?
@stacy
@Stacy Weng, it is after all fees including closing costs. It's very difficult to achieve on a regular basis. I'm in Seattle also so the home prices are pretty high. I generally try to make 25% off of my investment all said and done.
Here's a good example Seattle Oympic Hills Fixer and here are the comps to go with it Olympic Hills Comps. This one has at least a $100,000 spread.
from what I am reading, the 70% rule is a guideline, a ROUGH initial filter to help people quickly screen deals.. Are you supposed to toss a deal at 72%? no...
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ROI is a function of the amount you invested, @Stacy Weng. The more you borrow the lower will be your investment and the greater the ROI. On the other hand, your borrowing costs will be higher so your profit in dollars could be low. If you managed to get 100% financing and only walked away with $1, your return would be infinite. Yet, you only made $1.
Long term, like for buy and holds where you don't expect your initial investment to be returned for many years, if ever, ROI makes sense. I don't think it's an accurate measurement for a flip however, which is short term. Instead, we look at gross profit as a percent of the ARV.
In a high priced area like Fairfax, VA (and Los Angeles), a gross profit of 10 to 12% of the ARV is fair and reasonable, but no less. That is, if you sell a flip for $500k, you should gross about $50k to $60k on it after all costs. You can typically achieve this if your project cost (purchase price plus rehab) total less than 75% of the ARV.
Your first flip should not be a learning experience. To the contrary, you want as fat a deal as you can find to absorb any mistakes and not let your first property wipe you out. This means you have to find a good deal and run the numbers as accurately as possible. Rules of thumb are fine for screening, Stacy, and we use them all the time, but you'll want to estimate going in where you'll be spending your money as accurately as possible. Good luck.
Stacy Weng I wouldn't lower your standards for ROI if it's you first or your fifteenth flip. If you lower the ROI percentage than you open yourself up to more risk.
As a standard we won't do a project for any less than 15%. We make sure our repair estimator covers as much as we can see/are aware of and then add 5-10% contingency for what we can't see or don't know.
Typically we prefer to be at 20% or more.
It is harder to find funding with a tight ROI as well. For commercial lending (lending to your LLC) they are looking at the deal not your credit. A tight deal and you won't be able to get funded.
Now once it's all said and done and you have a few oops' or something goes wrong and you end up still in the positive then that's a different story.
@Stacy Weng indeed you are correct. I was just pointing out that once again, you have look at multiple scenarios to see where you are going. The 70% rule is a guideline and a very good one at that. I try not to depend on one solid way of doing things. I like to see multiple options and understand where I am going overall. For me it allows me to truly see as much as I can.
For Example, this is what I would normally do when looking at a typical deal. It may just be me being anal about things, but hey, for a guy that went to law school I like to know as much as possible when looking at things.
Assuming repairs are $25K for a deal and the ARV is $150K ...
80% Rule - $150K x 80 = $120K - $25K = $95K (Purchase Price)
75% Rule - $150K x 75 = $112.5K - $25 = 87.5K (Purchase Price)
70% Rule - $150K x 70 = $105K - $25K = $80K (Purchase Price)
65% Rule - $150K x $65 = $97.5K - $25K = $72.5K (Purchase Price)
60% Rule - $150K x $60 = $90K - $25K = $65K (Purchase Price)
55% Rule - $150K x $55 = $82.5K - $25K = $57.5K (Purchase Price)
It may not be necessary for me to do all this, but again I'm an info geek
@Kris Swierz, just curious, but when you come across these great deals with large spreads, especially when it's on the MLS, don't they get bid up with multiple offers? What I've seen around my area is that any decent deal (many with much lower spreads than your example) end up with multiple offers that get bid way up, so just curious if you've experienced the same and how you're still managing to get in on them and make your target profit.
Thanks @Jeff S. @Suzanne Griffiths, this is all great info and stuff to consider for each deal!
@Alfie Bartley, LOL, it's always better to over analyze and know every scenario vs. not knowing enough!
@StacyWeng, Most of them will get bid up but not all of them. Back in 2008 at the top of our market I purchased a home for $460,000 and I was able to sell it for $760,000 with about $80,000 worth of work going into it. That home had 8 offers on it.
@Kris Swierz wow, great returns, keep up the awesome work!
