Minimum Profit On Flip?

Question

Hey guys,

About to go into our 4th house flip and wondering how everyone analyzes a deal and decides on their minimum profit required to do the deal? Is this a personal preference or a % of the cash you put in? Are you going into any deal at any price with a minimum dollar amount return, or a return on the cash or amount of rehab you put in? Trying to nail down my minimum because I only have enough cash to really do 2-4 deals a year. How do you guys decide on your number?

Jeff S. · Answer

Cash-on-cash return or ROI is irrelevant in this case, @Bobby Rainbolt.  Most active rehabbers we do business with are able to borrow all their rehab money --  purchase and construction.  Thus, if they make $10 on a $1M property, with almost nothing invested out of pocket, their COCR/ROI is basically infinite.  Yet they only made $10.  Would this be a good deal to you?

Similarly, don’t set a fixed dollar amount unless you are always doing the same deals with the same ARV, which is doubtful.  You can claim to be happy making $25k on every deal and that might be OK for a $200k ARV property, but would you be happy making $25k on a $1M ARV deal?  Why not? $25k is still $25k, isn’t it?  But, what if you received a reasonable $975k counteroffer on your $1M property?  There goes your profit.  This makes no sense either.

Instead, when we underwrite a loan, we expect the borrower to make somewhere in the 12 to 15% of ARV ballpark.  This would be $60k min for a $500k ARV and $120k min for a $1M ARV property.  Our approach takes both your absolute profit in dollars and some of your risk into account.

I can show that if you add your purchase price to your rehab estimate, and the total is no more than 75% of the ARV, you will make around 12 to 15% of the ARV in profit.  This is nothing more than the 70% rule-of-thumb except, for properties with an ARV greater than $250k or so, you can use 75%. You should still use 70% for lower-value deals.  Always confirm this by running your numbers in detail.

John McDonald · Answer

@Jeff S. Great examples and solid advice. @Bobby Rainbolt If you're going to successful, long term, your numbers need to make sense. As Jeff pointed out, your numbers should be based on percentages, not specific amounts, otherwise you'll run the risk of getting killed on a high end flip as in the example Jeff provided. If you progress from SFR to multi-family, you'll need a winning formula that will always involve risk evaluation based on percentages.

Good luck and Merry Christmas.

Obed Calixte · Answer

Depends on the scope of work and investment required to determine what will make it worth the time and effort.

Cara Hobbs · Answer

For me, it's been a mix of personal preference, lessons learned, and a dash of market savvy. Here's a peek into my strategy:

• Percentage of Investment:
I've often looked at setting a minimum profit as a percentage of the total investment. This method takes into account both the purchase price and the rehab costs. It helps me gauge the overall return on investment and sets a benchmark for what I consider a successful flip.
• Minimum Dollar Amount Return:
On the flip side (pun intended!), I've also experimented with a specific dollar amount as my minimum profit goal. This approach offers a straightforward, dollars-and-cents perspective. It aligns with certain financial goals and helps me stay focused on the bottom line.
• Return on Cash Invested:
Another angle I've explored is calculating the return on the actual cash invested. It's like making sure my cash is working hard and not just sitting idly. This method gives me a clearer picture of the efficiency of my available funds.
• Risk and Reward:
Balancing risk and reward is a constant dance. Sometimes I'm willing to accept a slightly lower profit margin for a project with lower risk, while for others, I aim for higher returns when the stakes are higher. It's a delicate balance that hinges on each project's unique circumstances.
• Financial Goals:
Last but not least, everything ties back to my personal financial goals. Whether I'm reinvesting profits, paying down debt, or chasing specific milestones, my minimum profit requirements are aligned with my bigger financial picture.

So to answer your question, as a fellow small-time flipper with a limited number of deals, nailing down your minimum profit is crucial. For me, it's a bit of both: a personal preference and a percentage of the cash invested. I don't dive into any deal blindly; there's always a calculated minimum dollar amount return in mind that varies from deal to deal, ensuring a balance between risk and reward specific to my goals.

Happy flipping! ~Cara

Alan F. · Answer

Lots of great advice from commentators, all valid and worth consideration. 20% is kinda normal in lots of businesses, I also look at my time. For me time is money, if I can make more doing something else, I will.

Jake Baker · Answer

@Bobby Rainbolt

I assess based on the ROI of the money I put in. I look for a 50% return. i.e. I fund with hard money and 50k of my own money. I want a 25k profit on the flip. If each flip takes 6 months, I can deploy that 50k twice... meaning my annualized return is 100%.

Peter Mckernan · Answer

Some investors are $25K minimum on flips, or $50K etc. Or some are 10% ROI on the flip and nothing else.

I personally have seen $25K or more on flips for condo/townhomes, and $50K or more on SFRs. The % rule for profits is tough unless you are direct to the seller because once you add agent fee/wholesaler fee in there then you are lowering that possible deal acquisition due to a percentage of ARV.

The last note, you need to tack down your rehab costs on certain deals, then you can use that to your advantage on what to buy, the percentage or dollar amount on ROI.  This is because you could have a 50K rehab or 150K rehab and this will interrupt that deal acquisition if you are having a hard time on numbers.

Joe Mivshek · Answer

I work with many investors and I believe that every deal is different as far as profit goes.   I have had flips that return was as low as 15k, but it was due to inventory.  Most of the folks who do this frequently through me or my associates I would say like to double their amount put into rehab.   So if home is 350k, 50k rehab, sell at 450k minimum.   I believe there will be more opportunities early in 2024 than there have been in a while due to household debt, etc.

Minimum Profit On Flip?

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