Returns on Flip Properties

[Casey Cuppy]

I am just curious as to what investors are finding more important. I have an array of clients, some seem to care more about the actual profit while some seem to be only concerned about the ROI. What is the main thing you are looking at when deciding on a flip property.

[Shaun Reilly]

This is fun since everyone is using stupid examples on both sides to make irrelevant points.  :)

In the first no $hit column:  Yes much better to make $100K profit on a $200K deal than on a $2M deal.

In the 2nd column: Better to make $10 on a $60 outlay than $0.25 on a $0.50 outlay, assuming single transactions.  The 2nd one COULD be awesome if you can effortlessly replicate it like 10,000,000 times.  On a single transaction probably not worth the time to hand the person the product and have them give you the money if that was the only work involved.

Let us try to have some more realistic examples in the house flipping universe to keep it real.  

You have a deal with an ARV of $200K, you expect to make 30% on a $140K outlay with a break down of $100K purchase and $40K rehab. So a $42K profit and nice high return.

You also have a deal with an ARV of $450K where you would expect to make 25% on a $315K outlay with a breakdown of $265K purchase and $50K rehab. Giving you a profit of $78,750.

Which do you do?  Assuming I have the means to do the 2nd one but not to do both at the same time I am doing the 2nd one.  Lower percentage but much bigger absolute dollar profit with a good return and plenty of margin.  Now if I had a reasonable expectation of being able to do a 2nd one of the 1st deal in the same time frame then I'd do the 2 of them.  However not many people are tripping over those deals.  My net worth will grow faster with the extra $36K of profit than the extra 5% margin if I don't have another high return project going on concurrently.

FWIW I have an MBA with a focus on Opps and Finance as well as an MSF (Master of Science in Finance) as well as undergrad in theoretical and applied mathematics (among other things) so I know math and I know finance and I know business.  I actually really like math and think it is critical to properly evaluate the numbers but it is also important to realize this is not some static situation that can easily be modeled with some basic algorithms.