In this blog post we are going to be discussing what types of returns most single family house investors shoot for when buying property. We will also go over why you need healthy profit margins to keep the business running & consistently do deals. Lastly we will touch on what you need to avoid if you are looking at buying an investment property with thin profit margins. I hope you enjoy the article & if you have questions please reach out!
Basic Principle for Flipping Houses
House flipping or wholesaling is the process of getting a property well below market value, sticking some money into a renovation, & then reselling for a profit. The overall process is similar to that of a pawn shop where they buy something at a discount, mark it up, & sell for a profit. However, with house flipping you are dealing with a lot larger numbers & ramifications if something were to go wrong.
The normal Formula that we Use for Buying Properties is ARV x 70% – Repairs = Offer Price
What Does the House Flipping Formula Mean?
The formula mentioned above is what all the real estate guru‘s teach when allowing people to get into buying discounted properties. And there is a great reason for that! In this business, you should at least be running on a 20% profit margin if you are flipping houses. So where did I get the 20% from?
After Repair Value x 70%: Why we multiply the “after repair value” by 70% is because we take 10% off the top for holding costs, closing costs, & commissions. Then the remaining 20% focuses on the profit margin you should be shooting for. Why it is important to factor in a 20% profit margin is if you run across a major issue like a foundation repair (Has happened to us $15,500) you will still come out ahead at the end of the deal. On that particular property we still ended up making $3,500 & successfully paid our investor back in full. This is one of the major differences between investing with a rookie & experienced investor. We take into consideration what can go wrong & make sure that in the end we still come out ahead. We DON’T let emotions run our offers.
The end of the formula deals with the estimated repair amount. Again, this is where the experienced investor & beginning investor differ. Having done over 25 rehabs in the last 12 months we have a very good idea on what it takes to remodel a property. Generally speaking, I can walk through a home in 10-15 minutes & know exactly what needs to be taken care of. However, the newer investors are just shooting from the hip & could be extremely off on their rehab amounts. More important then the repair estimate is the After Repair Value. If someone is 20% off on the repair estimate it may amount to $3000 – $6000 which isn’t a huge amount. But, if someone is off on the repaired value that could mean a $20,000-30,000 difference. I am an active Real Estate agent so I do list properties for our company & other clients. Resulting in having the experience to determine & evaluate market values in very little time.
Profit Margin Basics for House Flipping
Like I had mentioned earlier, investors should be shooting for a 20% return on their flips. Why this is so important is because typically if you are running an investment company you have overhead costs & expenses. If you are spending 5-10k a month in advertising you can’t live off of 5% profit margins as your company will eventually go under in the case that something bad happens.
Also, say something goes wrong on a rehab & you were only set to make $10,000. You could end up losing money & not being able to sell the house. Note: Make sure you have multiple exit strategies in mind for each property you buy (rehab, rent, refinance, lease option, rent to own, live in)
In our career we have had a loss on a property that we bought. I was naive to the fact that the house was in a great area but it needed more work than i anticipated. I thought it was going to be an easy turn around but we ended up having to put on a new roof & bringing money to closing. Our investor was paid back in full & that was never in question. All said & done we ended paying for the new roof ($12,000) and also bringing $6,000 to closing. What a $18,000 learning experience…
How to Buy Houses Below Market Value
In order to buy property below market value you either need to be on a wholesalers list, or have a great marketing system. I find that having a great marketing system works much better & allows you to secure much lower prices then you would if going through a wholesalers. So essentially what we do is market to potentially motivated homeowners & ask them if they want to sell their property. If they say yes, then we take the conversation from there & make an offer. If they say no, then we just keep going. It is really a numbers game when it comes down to it. We get roughly 1/7 homes that we make offers on. So if we can generate enough leads in a month we can put multiple properties under contract.
Invest With Us
If you’re thinking to yourself that it may be a little bit overwhelming to figure out where to begin, we can help! Learning single family house investing can be a difficult journey if you are starting from scratch. We mentor beginning real estate investors if you are willing to fund renovation projects for us. An example being: We borrow $75,000 for purchase & rehab at 10% interest secured by a commercial mortgage & we walk you through each step in our rehab process & go over how we found the deal, put it under contract, & took it from contract to close. Compared to the $50,000 real estate investment courses the gurus are selling, you will actually be getting paid for this! Contact us today on our form below or email investwisc@gmail.com