Fix & Flip Analysis Fundamentals

[Ross Hayes]

Hello

We've had great success on our two SFH long term rental properties, and one of the parts that I really enjoy in this endeavor has been the deal analysis. I've enjoyed creating and tweaking our own analysis tool to help us analyze deals.

I don't think we are interested in pursuing flips, but I'm curious to better understand the analysis side of this strategy to continue my learning.

I've tried to do some research, but I keep coming up with some areas that I'm not following.  Can you help?

I understand that the most basic formula is ARV - purchase price - rehab = profit. I'm comfortable with all of those, but I know that there is so much more than goes into your return than just those three main levers.

Specifically, I'm getting hung up on 1) financing, 2) closing costs on both ends, and 3) holding costs.

            - For any part of the project that you finance, whether it be purchase, the rebab, or both, do you simply look at the monthly loan payment for that leverage and multiply that monthly debt service payment by the number of months you expect to hold the property?

           -  If so, then that total (for example...monthly debt service is $2,000 and you underwrite at holding for 6 months, then you factor in that you have a total of $12,000 cash that you will be putting into the deal over that 6 month holding period) counts towards your "costs" or "cash into the deal" that you need to factor in, correct?

           - Is there a general estimate proxy that you use for factoring in closing costs for the purchase and sale of the property?

           - Is there a general estimate proxy that you se for factoring in any closing costs with the lender for the financing, assuming it is not an all cash project?

Coming from the buy and hold side of investing, I'm very focused on cash flow, cash on cash, and then looking at the other ways that I value a deal (appreciation, principal paydown, etc.). But as I think about a fix and flip, beyond just swagging an ARV minus your purchase price and minus the rehab budget, I know that there is so much more to the equation to understand a true return, especially as it relates to putting your own cash into the deal.

Thanks in advance!

[Nicholas L.]

@Ross Hayes

no estimates, no proxies, no swag.

you do the math.

you need to know what your buy closing costs will be, what your holding costs will be, and what your sell closing costs will be. 

[Mike Klarman]

For flipping you have to be in a viable market that produces such opportunity. Your big number you want to look at first is Project Cost/ARV and get a %. That tells you what % of the ARV does the project cost. 75% is eh, less than 75% decent. 70% good. Less than 70% ding! ding! ding!

Figure closing costs including origination, service fees, and title at about 5% of purchase price.  That's just a rule of thumb for a quick calculation.

Flipping is could be cost intensive and then bring tax liability when done as a one off, for instance if you did 1 per year maybe it's not worth it.  But if you could open enough channels to flip to scale and do 5x per year across 3 - 5 markets and now with volume you've made it something worthwhile.

[Cam Schwartz]

Hi @Ross Hayes, all great questions, can tell you're very diligent in your analyses.

You're understanding of estimating monthly payments is correct. Sales commissions tend to be 4-5% of the sale price, split between the buyers' and sellers' agents. Closing costs vary but are usually at least a few grand in addition to the origination fee which tends to vary between 1-3% of the loan amount.

We have a simple yet detailed fix and flip calculator (cash flow tool) that clearly accounts for all of the relevant costs and gives you a sense of net profit, ROI and total cost associated with each project. Happy to share a copy!