Ways to Increase Your ROI

[Greg Carr]

There is so much information out there, sometimes you just don't know where to go. I am a fan of taking my time to read or listen to a whole book, and get some very deep answers, but sometimes you just need the bullet points. My purpose here is to just give the bullet points, and a reader can have the option to look further into each one on their own.

These are obviously my opinions. Feel free to argue your point.

So, here is an up-front list of simple ways to increase your ROI. I want this list to grow as we add to and improve it.

• Buy the highest ARV you can afford: The higher the ARV, the higher your ROI. If I buy a house for 100K, put in 50k of work, and list for 200k, I will get about a 50k return (not including closing costs etc.). If I buy a house for 200k, put in 80k of work, and list it for 350k, then I'm obviously going to get a greater return for putting in about the same amount of time.
  
• Buy & hold: If you flip a property, you make a flat return. If you rent a property, you are not only collecting rent, but your property value will go up over the term of the loan. If you hold the property past the term, you will be pocketing some great passive income.
• Use a rehab loan: A rehab loan will loan at a higher DTI and will approve of distressed properties. After the repairs are completed it rolls into a conventional loan. Put plainly, less money down = more deals = bigger ROI. If I have 100k cash and I flip and rent one property with a 120k ARV, I'm doing good. If I use a rehab loan and flip and rent 3 properties with 120k ARV each, I'm doing great!
  This is something that a lot of investors do not take advantage of because they simply do not understand it. The loan costs will be higher, but it is easily offset by the returns.
• Flip then hold: One thing you can do is flip 2 or 3 houses to build up larger cash reserves then buy a rental. Theoretically, this allows you to buy a bigger property to rent which will collect a larger rent over the years. I know a few people who do this over and over again, and it seems like a solid plan.
• Good, cheap contractors: Many contractors will quote $20,000 to fix a foundation, when there are others out there that can do it for less than $5,000 and still do a decent job. Still, others will also do it for less than 5k but not even finish, and next time you call him he's already beat it and skipped town. I think getting a good referral from a reputable source (IE your friend who used them several times) is the easiest way to find good contractors. However, many will never turn down a contract, so you may see a good contractor go downhill fast if too many people start working with him (example: he's used to doing 3 at a time, now he's doing 7, and 2 don't even get finished in time or at all).

[Jon Holdman]

Uh. No. Higher ARV doesn't translate into higher ROI in any way. Better deals give you a higher ROI. In your first example you get a $50K return on $150K of investment for a 33% ROI. In your second example you get a $70K return for an investment of $280K which is a 25% ROI. That's a lower ROI than the lower ARV property. The amount of the return is higher on your second deal, but the ROI is lower.

Of course that's all "flip this house" math anyway and has little relation to reality. If the additional costs (purchase closing, holding, money, and selling costs are factored into these two deals are even further apart. The first deal has rehab plus purchase of 75% of ARV. The second is 80%.

Assuming an all cash deal (no financing so money costs) and that all these neglected costs come out at the back end (they don't) then the true profit potential for the lower ARV deal is around $30,000 and the potential on the more expensive deal is $35,000. So the difference between the potential ROIs is even worse (20% on the better deal, 13% on the more expensive one. That's a simple consequence of the higher percentage of ARV for purchase plus rehab on the second deal.

If you do use hard money then its even worse.  Potential return on the first deal is $16K and $10,500 on the second.

Maybe it will.  Maybe it won't.  The only thing you can say for certain is the loan balance will get paid down.

More significantly you're comparing apples to oranges.  Buying rentals is making an investment.   Fix and flipping is a job.

Financing does often result in higher ROI, though lower absolute returns.

Contractor pricing can vary A LOT.  Multiple bids are key.  Truly, though, I think if you want to be a successful rehabber you go the next step.  You have your own crews.   You will need a few licensed (and therefore more expensive) employees but most of your employees will be paid quite a bit less than what you would pay for the same labor as a contractor.