Flip or flop? Advice needed ..

[Kayla Scordo]

Hello BP Community,

My boyfriend and I are considering a flip and would like to get feedback from this amazing community.

Our backstory: we are interested in flipping so we can build up our capital reserves and then move into rental properties. My boyfriend is extremely handy in all aspects of construction, is a structural engineer by trade, and owns a construction company in the steel sector (infrastructure based). We bought our personal property a few years ago and gutted and renovated ourselves. A production company for HGTV has shown some interest in us however, nothing is concrete.

We recently found an off market property we would like to flip. It is located in a nearby, desirable town. It needs quite a bit of work and the seller will only take cash (not open to seller financing, unfortunately).

The numbers:

Purchase price: 322k

ARV: 540-560k

Repair costs: 100k

Holding costs: 1k/month (conservatively estimating a 6 month timeframe)

Realtor fees: 33k

Closing costs for both transactions: 10k

Hard money lender would charge 10% interest, 2 points, will put 80% of purchase price down. We would be responsible for 20% of purchase price and fronting the rehab costs in the beginning of the month until they reimburse at the end of each month.

We still need to call other hard money lenders/ try to find private investors to see if there are better financing options out there but conservatively, based on this loan, we are projecting around 40k profit before capital gains taxes when all is said and done.

Would you do this deal? Is it worth all the work for that kind of profit before the government takes their share? We see some signs of the market slowing down/changing where we live (NJ) and this concerns us. We would be doing as much of the work ourselves to keep costs down but is it worth trying to balance two very demanding endeavors (construction company and flipping) for that profit? For the experienced flippers - what does your minimum profit margin look like?

Thank you so much in advance for any feedback, insight, or guidance you can offer.

[Jeff S.]

If your goal is to develop an ongoing, multiple-flip business, @Kayla Scordo, then this deal would be marginal but ok. Based on the numbers you presented, here’s where I think you’ll end up (click on the table to enlarge it):

We define a good deal where the flipper earns between 10% and 15% of the ARV. At 10.2%, you're at the bottom end of that. I also estimate a $55k profit, not the $40k you mention. I don't know how you got that which is why I always present all numbers when discussing a deal.

Note, the greatest expenses for any “normal” flip, as shown above, are always the rehab costs, financing costs, and sales commissions. These typically total between about 80% to 85% of the total expenses. In your case, they are a bit high, totaling 89%. This because your rehab costs, at $100k, are also high for a $540k property. (Note too, the smaller dollar expenses can be state dependent. We’re in CA, so you should adjust accordingly, but relatively speaking, they just don’t add up to much.)

With a purchase price minus repairs at 78% of the ARV, you could see this coming. While just a rule of thumb, we normally use this to screen out properties greater than about 75%.

All of this is why I say your deal is marginal. Not a solicitation (we don’t loan outside of CA) but if one of our borrowers brought this deal to us, we’d think hard before we loaned on it. A bit of a coin toss, it would depend on the background and experience of the flipper.

My greater concern is that you plan to do the work yourselves. This leaves no opportunity to expand the business. As you wisely noted, taxes will kill you here. These would be ordinary income, not capital gains as you seem to think. If, on the other hand, you could do 6 or 10 deals at a time, as a goal, then it could be worth the effort. There’s no way you’ll do that on your own, however. I’d encourage you to rethink this part of your plan.

Last, you mentioned that this property was "off-market" – lately, the most overused phrase in real estate. Don't get sucked into the hype. "Off-market" means not listed on the MLS. That's it. It does not mean, "Good Deal."

Good luck, Kayla, to you and your husband.