How to analyze a flip

Question

When analyzing a potential property to flip, what criteria or metrics do you use (or find most important) to determine if it’ll be a good/profitable deal?

Will Barnard · Answer

@Bianca RodriguesAdvice of using the 75% figure is not going to be accurate for all areas, at all price points, and for all investors. That makes this advice very sketchy. Investors must know that these rules (more accurately “guidelines”) which were intended to be a quick back of the napkin calculation to see if the investment was worthy of further review and nothing more. Never should they be used (whether 70%, 75%, or any other %) as a purchase decision.

With that out of the way, here is my answer for how I have choose an investment to flip over the last decade and a half:

The neighborhood is checkpoint number 1. I make sure the street and the houses on that street, along with the streets around it are sufficient to produce a good resale value. Buying a flip that sits next to another junker house (or across the street from it) will hurt your buyers pool which in turn hurts your resale value. When more buyers are interested, you typically get better sold prices from that.

Checkpoint number 2. What is the current market conditions of this area? I want to know the average DOM (days on market) for listings and what the current inventory levels are, what the previous 6-8 quarters of inventory were. This helps me predict more accurately what I can expect the market to do during my hold period. This is important because knowing if the market is likely to stay flat, drop, or increase in price is valuable information.

Next step is to ensure this specific property does not have any major resale defects. What I mean by that is does it sit on a busy street, next to commercial, in an airport flight path, near railroad tracks, no garage (if most homes have them), too many steps from street to front door, no yard space, etc. All of these potential deficiencies will dramatically reduce your buyers pool hurting your resale value and likely increasing your holding costs as it will likely take longer on the market to sell.

Lastly is the numbers of the deal themselves. Purchase price, holding costs (debt service, taxes, insurance, maintenance, utilities, etc), resale costs (escrow fees, transfer taxes, real estate commissions, title fees, recording fees, etc), ARV (I call it exit value) and of course rehab costs. So often investors get the exit value and rehab costs wrong as they are subjective as opposed to holding costs which are much easier to get accurate.

Your exit value less all costs above = your profit. So then you must decide via side by side comparison one investment to another which has a better return. Better returns are not created equal in each investor’s eyes. Some do quantity and have tighter profit margins while others do fewer with higher profit margins. Only you can decide which is better for you on that one.

Lastly, consider the level of rehab which will have a direct impact on your holding costs and rehab costs. A heavy rehab will have longer hold times exposing you to more potential for market conditions to change vs a quick lipstick flip.

Hope this was helpful in answering your question.

Carini Rochester · Answer

1) After Repair Value ARV

2) Cost of repairs

3) Closing costs

4) Holding costs

5) Real estate agent fee

Kevin Ivey · Answer

I keep it straight fwd simple spread sheet. ARV

-purchase price

-financing cost

-carrying cost (interest,HOA, property tax, utilities) x # of months I expect to have the project.

-repairs of course

-realtor fees

-closing cost/excise taxes (WA 1.6%)

= profit

then I think about how much active time will I have in project & how confident am I on ARV & repairs? Then $/month do I make more than more target (what I used to make at W2 job)

Good luck 🤞

Billy Daniel · Answer

Use a realtor to get you an ARV.  During your inspection period, have a contractor (or 2 or 3) write up a quote for the repairs.  If purchase price plus repairs still gives you room, go for it!    Thats the best way, in my opinion.  You probably have no idea what it costs to hang drywall or re-route plumbing.  Estimating costs on rehab is hyper local.  Others have said use the 75% rule, but in reality go for whatever you like.  If total costs equal 85% ARV and you're ok with that, go for it!  There really isn't a "right answer" when it comes to this stuff.  You'll get stuck in analysis paralysis if you keep trying to meet a hard and fast rule without any actual experience!

Good luck and I wish the best for you!  It really is a lot of fun!

Eliott Elias · Answer

Multiply it's ARV by .75 and make sure you're under that with purchase price and rehab

How to analyze a flip

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