LA Flippers: What is your expected return of interest per deal?

[Account Closed]

Good afternoon everyone,

I would like to know on average, what is your expected ROI for a Fix and Flip in the Los Angeles County?

I know every city is different, and it depends on the project... But in average, what numbers would make sense for you when you analyze a deal? 

Do you usually come up with a percentage, or with a specific $ amount?

Thank you in advance for your help!

[Jeff S.]

ROI is Return on Investment, @Account Closed , not Return on Interest as you state in the title. There are only about a million ways to calculate it but generally, it's:

ROI=Net Profit or Loss/Amount Invested

Either way, I don't believe this is an appropriate way to evaluate a flip.

Getting money after you have a number of flips under your belt can be fairly easy and all the higher volume and/or higher dollar flippers we know eventually run out of cash.

It's pretty common to obtain 100% financing for both the purchase and rehab funds after you've been doing this for a while. Borrowing, of course, is a two-edged sword, because your interest payments, especially for a hard money loan, can eat 25% to 1/3 of your profit. Nonetheless, many flippers will borrow as much as possible to do as many deals as they can and keep the pipeline full.

Obviously, the more you borrow the less your Amount Invested is in the formula above and the higher is your ROI. If you borrow 100% of the costs, your ROI will be infinite and it doesn't matter if your profit is $100 or $100k. Nor does the cost of the property enter into the calculation. That is, you wouldn't buy a million dollar property to make $100 even if that represented an infinite return on investment.

Similarly, merely stating you expect to earn a fixed minimum $20k to $30k on any flip doesn't make sense either since that could be against a $350k property or a Million dollar deal.

Instead, we use return on ARV to determine if a flip is a good deal or not. In our case, we define 10 to 12% of the ARV in profit as a good deal. For example, if a property with a $500k ARV looks like it will result in a $50k to $60k profit, we consider that fair. A $1M ARV would have to produce a minimum $100k to $120k. We won't do a loan if it does not look like the rehabber can earn a profit of at least 10 to 12% of the ARV.

This approach takes both your profit, in dollars, into account as well as the value of the property. It also takes risk into account because it predicts you'll make more on the higher value properties, where price swings, rehab overages, and appraisal discrepancies can be greater.