Single Family Flippers in B Class Neighborhoods, What is Your Margin?

Question

Hi fellow BP investors. I'm currently looking to flip a house or two in my local B class neighborhoods. For context, the ARV I'm shooting for is $325,000. This is my first deal so I'm trying to be cautious but also not necessarily looking for a home run, but rather the experience. I'm looking for homes that need moderate rehab ($30Kish). Given those numbers, the standard formula would say $325K x 70% - $30K = MAO. That would net me around $50K after holding costs. Would it be foolish of me to be okay with $15-20K after holding costs? Would there be additional points to consider?

Signed,

Newbie

Signed,

Newbie

Andy Sabisch · Answer

The thing you need to keep in mind is that there is more to a deal than the famous formula.

Do you have a solid reno cost or is the $30Kish a swag?  $30K goes quick in todays market so  you need to make sure of that cost - for a moderate rehab at your price point, that seems light.  You always need to have a contingency even if you are solid with your numbers.  We are doing one know that an $8,000 expense we had not expected but had set aside a contingency for You will ALWAYS have surprises.

The ARV is another area where many first timers (and even seasoned investors) fail to have the current pulse of the market and then over price it and the property sits.  The bad thing is if you based your reno on the higher sales price and are stuck dropping it to move it - carrying costs can kill the deal and if you have to sell, you are underwater.

You really need to come up with the ARV and be realistic - we undershoot the market and get deals locked up in under 2 weeks.  Then get a solid reno cost and build in a solid contingency . . . we use $10K to $20 for most renos to address the unexpected which always come up.  We have trades that can give us solid numbers and draw from past experience.  Then look at closing costs, carrying costs for at least 3 months longer than you are expecting it to take and then the sales costs.  When you have these numbers, you can build in your profit and see what makes sense.

Hope this helps - be happy to give you more details if you want them

Corby Goade · Answer

To each their own- I think a new investor on their first flip breaking even is a HUGE victory.

Personally, I like to end up with a minimum of 15% based on the sale price, but I don't mind less if the deal works and I am confident about the demand and buyer pool.

Sultan Ali · Answer

Hey Vanessa, congrats on getting ready for your first flip! Honestly, $15–20K isn’t crazy if your main goal is experience, but just keep in mind that surprises pop up fast especially with rehab. The 70% rule is a solid guide, but not always realistic in every market. As long as you’re confident in your comps, rehab budget, and holding costs, it can still be worth it for the learning. Just make sure you give yourself a little cushion so you don’t end up working for free.

Michael Hernandez · Answer

Vanessa, your math looks solid and it is smart that you are thinking about risk before jumping in. Taking a smaller profit on your first flip is not foolish if it gives you the experience and confidence to scale, just make sure you build in a cushion for surprises like higher material costs, delays, or inspection issues. Many first-time flippers underestimate holding costs, so double check those numbers and run a few worst-case scenarios. If the deal still makes sense with a $15-20K profit, it can be a great learning step.

Peter Mckernan · Answer

Use 70% as a rough number... I take this as 70% ARV and an additional 30K off the list price right? So in the ballpark of 200K. What is your contractor saying it will take to rehab the place, has he walked it? I would get an estimate from that GC and then reconstruct your numbers to make sure you are good on that numbers you say above.

The next question is a deeper one.. Should you price in points and holding costs are roughly $15K-$20K. Well, that really depends on DOM in that market, your contractor, the scope of work for the contractor, down payment you put down on the HML, the interest on the loan, are you getting rehab costs too, and flip insurance too. With all this, this could be more or less than 15-20K for holding costs. You need to really work out the numbers and know the market. If you have all the stuff down and you overprice the property for the market... You will be siting for longer and that 15-20K goes to 22K-25K quickly.

For the points, most lenders will charge points from .5% all the way to 2.5% points. The higher the rate typically the lower the points, and the lower the rate the higher the points. The other fees that they will charge are doc fees, appraisal fees if you are getting one and other random fees that you need to look at when vetting lenders

Single Family Flippers in B Class Neighborhoods, What is Your Margin?

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