Rehabbers

[Rich Weese]

If you are still in the rehabbing business, are you using borrowed funds or your own money or joint venture? If not your own funds, % for JV or rate you're paying for borrowed funds? After paying for borrowed funds , what is your margin of profit ? Rich

[J Scott]

Originally posted by Marc Cleverley:

Forgive me for being so naive, I'm new to the rehab side of real estate and am searching for my first deal still. How would being more leveraged increase your ROI %? I understand your $ profit will be higher, but how does that affect your % return? Unless you buy at a deeper discount in the higher markets. Just trying to learn the ropes here, thanks.

For a typical flip, ROI can be determined using the following formula:

ROI = PROFIT / INVESTMENT

So, let's take an example deal where I purchase a property for $50K, put in $20K in rehab, spend $10K in costs (purchase costs, holding costs, selling costs) and then resell for $100K. In this case my total investment is:

$50K + $20K + 10K = $80K (INVESTMENT)

And my profit is:

$100K - $80K = $20K (PROFIT)

If I used all my own cash for the deal, my ROI is:

ROI = PROFIT / INVESTMENT = $20K / $80K = 25%

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Now, let's say I find a lender who will lend me 75% of the funds to do this project. In this example, he'd be lending me 75% of $80K, or $60K. That means I'd be spending out of pocket:

$80K - $60K = $20K (INVESTMENT).

Of course, there are costs associated with that loan. In this case, let's assume I'm paying 12% annual interest (1% per month) and I borrow the money for 5 months to complete the project. The cost of the loan would be:

1% (interest) * $60,000 (principal) * 5 (months) = $3000

So, the cost of the loan is $3000, which would impact my overall profit by $3000:

Profit = $20K - $3K = $17K (PROFIT)

So, by leveraging, my ROI becomes:

ROI = PROFIT / INVESTMENT = $17K / $20K = 85%

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As you can see, profit dropped a little by borrowing (leveraging), but ROI jumped tremendously.