House Flipping ROI Question

[Ben C.]

Hello,

I will be financing my purchase and renovation costs (with a down payment of course) and was wondering in calculating my ROI….

Do you calculate the ROI as the total CASH out of your pocket (Down payment, closings costs, mortgage payments) so profit (money left over after the mortgage is paid off and closed) divided by cash out of pocket

or divided or as the TOTAL costs (including the balance on the mortgage) so the profit (money left over after the mortgage is paid off and closed) divided by the total cost including the mortgage portion that was only paid off at closing. 

Thoughts?

[Sean Cole]

Originally posted by @Ben C.:

Originally posted by @Will Barnard:

Did it come out of pocket? If so yes. On the purchase end, unless you financed it, then yes, it came out of pocket. On the sale side, title, escrow, and most closing costs are paid from proceeds of escrow so they do not come out of your pocket and thus, do not factor into your ROI equation. If yo aid for a termite inspection upfront on the sale, then yes, that came out of pocket and is included.

 Understand so closing costs on buying side are part of cash out of pocket calculation (along with down payment, renovations, mortgage payment etc) and on selling side they are NOT part of cash out of pocket. 

I would be financing the renovation costs (lumped together with acquisition mortgage). Also, gives me the added security of inspectors from bank checking contractors work before payment released. Less cash out of pocket in this situation and even higher ROI% from what I am taking away from your advice. Correct?!

 That's why I pointed out the difference between "earnings" and "profit" in my above post...  

Add up all of the cash you put into a project - this is actual dollar bills removed from your checking account - and that's your initial investment. Your Earnings Line 603 on the HUD when you sell the house - that is, the check you get from the title company. If you borrow through a mortgage, we're still ok here because the mortgage would be shown as paid off on the HUD.


Your last question is correct. If you borrow, your ROI should be much higher. The caveat is that the interest monster eats every single month! If you don't finish and sell quickly, those interest payments can eat up all of your profit.