All Forum Posts by: David Lowe

Also, + short term capital gains tax

Hi @David Lowe. I flip in LA and Orange County and I can tell you that from my experience, it's pretty difficult to use the 70% rule. Prices are completely different here on the West Coast compared to the rest of the nation. I've spoken to several investors who also feel the same way. What most of us have done is adjust the rule to see how much profit we want, and work backwards. Instead of calculating what your MAO should be, calculate to find out what your MAO has to be to obtain the profit margin that you seek. Hope this helps. Good luck!

If you could find a 70% rule property in San Diego that would be a home run.  I have seen 2 that other investors purchased recently that likely qualify.  Both had BP open houses.  

One had title issues that took a lot of leg work to resolve.  It was purchased for ~$125K and was going to sell for close to ~$400K but do not know what was spent on rehab but it was a little 2 BR/1 BA property.  So I would think the rehab was probably $40K-$50K.

The other has much larger pockets but it was mis-classified as a historic property.  When classification was removed and when shared cost with neighbor on a retaining wall that was a huge expense it end up being a home run.  The purchaser was unaware at time of purchase that the house was moved to that property and the historic property was erroneous.  @Justin R. was part of the BP open house.

I do not do flips but know the San Diego market pretty well.  I would not look at the 70% rule as a prerequisite as there are just too few but I would have a prerequisite that the flip should project $100K profit otherwise it is too risky (I would make an exception if you have a lot of experience with flips then maybe it can be worth the risk at a little less than $100K projected profit).

BTW we do a fair amount of rehabs on our buy n holds and we virtually always underestimate the rehab cost.  Unexpected expenses should be expected.

Hope this helps.

With due respect, there is bad advice above that I would not use for business decisions, @David Lowe. Your intuition is correct.

The 70% rule of thumb assumes you will be financing your flips using a hard money loan, realistic rehab costs, and that you will use an agent to close at least one side of the flip. For relatively low ARV flips, say less than $250k, which are scarce in southern California, it will provide approximately a 12 to 15% return on the ARV.

Many costs, such as title insurance, utilities, and escrow fees, don't rise much with the ARV, and have a small impact on the return on a flip as the ARV rises. Thus, your project cost (purchase price + rehab costs) can be slightly higher as a percent of the ARV and still maintain the fair return.

For a typical southern California flip, paying 75% of the ARV minus repairs, will result in a 10 to 12% return and we think that's reasonable -- but not a dime more. In your case, David, you can't pay more than $335k for this deal. After all expenses, which were not even close to being accounted for in any example above, I estimate you'll net about $62k, or 12.5% of ARV.

Here are my estimates, which the others above should read, and I know they are reasonable in this region:

You'll find after reviewing many flips, that your return drops about 1% for every percent you exceed a project cost that's 75% of the ARV. That is, in very rough southern California numbers, you'll earn about 5% of ARV if you pay 80% and be lucky to break even at 85%. Why would you even do that? In our view, 10% of the ARV is the minimum return you should make to stay safe (and keep your lender safe).

This is not a solicitation. We don't loan in San Diego. Many local HML's have similar spreadsheets you can use for an evaluation and they will provide these as a courtesy. Lightening does strike on occasion, but it's doubtful you could find enough 70% deals to run a successful flipping business in southern California.

Paying 75% is challenging, no doubt, but these deals are available in enough quantity to make a go at it. Unless you’re an agent and also completely fund using your own cash, please don't rationalize that it's ok to pay more, as many do, or you won't be around long.

(Justin: With purchase price of $382k, rehab at $130k, and ARV of $600k, you'll net about $15k, i.e. ~break even at 85%. With respect, please be careful with this advice, or show all numbers.)

No.  By 85%, I mean:

• ARV: $500k
• Rehab: $50k
• Purchase Price: $382k  ($450k * 0.85)

FWIW, (and it may just be the people I happen to speak to most often) most of the activity I see folks doing locally right now is more like:

• ARV: $600k
• Rehab: $130k
• Purchase Price: $382k 

In other words, less cosmetic $40k flips and more "add a bedroom/second story" stuff.

Kind of like cap rates, I think that you need to get to know your personal market and adjust these rules accordingly. Find people who are currently flipping in your area and ask them for their numbers. From there you'll have a more realistic picture of what the market can bear and what bar you're shooting for.

I'm not flipping locally, so my comments are 2nd hand ... but from the folks I know who are doing it locally, "No."  The profit margins I'm hearing are the equivalent of 80-85% more typically.

Like other RE "rules" such as the 1% rule and teh 50% rule, the 70% rule is only a rule of thumb. It allows you to quickly evaluate a deal. 

With that said, you need to analyze deals with detailed numbers. Use your example, you should be able to make 10% return at a purchase price of 380k.

ARV 500k

Purchase 380k

Sale cost 30k

Rehab 40k

holding cost 5k

Profit 45k

@David Lowe

Big fan of Expensify for managing expenses and tax deductions. I have a walkthrough video I can send over if you PM me.

Realtor.com App

Zillow App

DealCheck

Evernote

These are the main ones i use.  Also have the Redfin app, but haven't used it much yet.