I've been interested in real estate for quite a while and about a year ago really started digging into investing, more specifically house flipping. I've been reading through all materials and consuming all bigger pockets has to offer. In my "normal" job I am responsible for running a specialty contracting company and in running that company I'm a numbers guy, sometimes to a fault. I'm afraid paralysis by analysis is beginning to set in and I'm hoping someone can help me "right the ship" on my internal dilemma
I've studied J Scott's book on house flipping and in that book he gives a basic formula of:
Maximum Purchase Price (MPP) = Sales price - fixed costs - profit - rehab costs. As you all know, profit is what you desire to clear out of the deal. In all podcasts and deals I hear analyzed, the total profit number is always discussed, but rarely do I hear a comparison of cash out of pocket and how that profit relates.
Example: I purchase an investment property for $80,000 and the bank will loan 80% of the purchase price and construction estimates. For easy math, say the ARV was $160,000, holding costs were $18,000, rehab was $24,000. Purchase price plus rehab is $104,000, so bank will loan 83,200. For purchase and rehab, I need to cover $20,800, let's assume I pay cash out of my bank account. So if I sold the home for $160,000, holding costs were $18,000 and rehab was $24,000 and I purchased for $80,000, the profit would be $38,000.
Here's my question/comment: The profit in the DEAL was $38,000. In that example, I came out of pocket $20,800, so my personal profit was really only $17,200. Am I looking at this the correct way? I hardly hear that talked about and was just curious if I'm missing something here.
Thanks in advance for the guidance. I'm looking forward to being an active member of BP.
J.R.
