One of the first things I ask any potential wholesale buyer or investor is what kind of return they want to make on a Flip. Their response usually is a good indicator of the detail of their equation to analyze a potential deal. If they respond with “I want to make $X amount of money on the flip”, it may indicate they haven’t thought through the response. Someone who says they want to make $10k or $15k on every deal may change their mind when it comes to buying a $500,000 flip.
In my opinion, the return should be based upon the risk and amount of total investment. Depending upon the competitiveness of the market, a good net return on a flip should be around a 15% to 18% return on the total outlay of capital. This net return should be calculated after all acquisition costs, improvement costs, holding costs and interest on loan are paid. In my experience it is important to have an equation rather than hoping for a flat number when analyzing potential flips.
This equation consists of three factors. These factors are: after repair value or ARV, the costs of rehab/holding costs and the acquisition price. I prefer to work backwards when determining my acquisition price or final offer price for a potential flip. There are multiple factors that go into this including the condition of the home, age of the property, as well as price point. However, I usually start by estimating the retail or ARV of the property. I then deduct the closing costs, estimated rehab costs, and the estimated holding costs. I then calculate an offer price based upon the target return and these numbers. This number can change if paying cash vs. servicing debt as well. At this point, I have a hard number to offer for a home. If I can get the property at that number or below it will likely be a profitable venture. Remember….you make your money on the buy.
There are obviously many factors that go into this process and analysis, and the quicker you can get to a final number the more deals you can likely move on. Fast money and fast answers always win in this business. Keep an eye out for future blogs going into more detail of this analysis and let me know if you have any questions.