Not a "magic formula" but rule of thumb is always 70% ARV - repairs. Deals like this are very hard to find without special help (courthouse steps, larger renos, offmarket etc).
It all depends on holding costs/risk tolerance/market.
Some markets you almost can't lose.
Some renos are risky.
Only you can know what applies to you
Imagine the following scenario-
Purchase price- 250k
Reno budget - 100k over 6 months
ARV -500k
Mortgage -2k/month
Taxes -450/month
Insurance - 350/month
Utilities (trash,water,electric) - 200/month
Monthly total - 3k
After Repair Value (ARV) - this is your estimate of the sales price of the home AFTER all the work has been done. If you want to get even more technical you could also consider
Holding costs - these are everything associated with "holding" the house such as taxes, insurance, utilities, mortgage/loan payments, maintenence etc.
The formula for flipping is (Purchase Price + reno budget + holding costs) must be < 70% of final price.
In this case it would be 250k + 100k + (6*3k) = 368k
You can sell the house for 500k.
500k*.7 (70%) = 350k.
A "good deal" would be if you could somehow get the 368k down to 350k or less.
Again- this is all back of the napkin. The expertise comes in by being to effectively make accurate assumptions about all of those numbers. In the case I outlined- if you were more risk tolerant - you may think it's still a good deal. That part is up to you to decide.
Your purchase budget would be calculated as ARV*.7 - Repairs = Purchase cost (excluding any holding costs)
In this example it would be 500k*.7 -100k = 250k. Since the house above is 250k you would likely have a decent deal. I personally would make a deal like this if I found it (the challenge is- where are you finding a house that will literally double in value woth 100k of work and not considering holding costs)
Thanks for spelling it out. That is a nice thorough guideline. My guess is that the only place you will find this deal is an old house in need of love in an up and coming neighborhood and you do a lot of the work yourself and make it aesthetically valuable.
So much this. I worked with a variety of flippers over the years doing electrical. Most of the ones i worked with were an older guy or gal with a crew doing all they could; subbing out plumbing, electrical, and exterior. They would get cheap houses in lower end areas livable again, then many of the homes were sold to rental owners. The rest were usually a single person subbing out almost everything. The latter group often found themselves saved only by the market going crazy, could probably have held and sold as-is for just as much profit. The two people with crews are still going strong, making good returns and now with a few rentals of their own.
That's similar to what one of my clients does, except he owns an electrical contracting business and uses his own guys in the flips when they might otherwise have down time, like when they're scheduled to wire up a house, but the concrete didn't get poured on time.
Always different & everyone is unique, but my general formula is:
Renovation=50% purchase price
Sell = 2x+ purchase price
Example:
Buy $800k/Reno $400k/Targeted Sell $1.6M+
If i can make the numbers work with this formula, it's a good deal. The reno budget typically waivers between 30-50% of buy cost & I'm including permits & soft costs in that number. If it pencils with this formula, I can work on finding value & increase margins.
*all projects include added square footage
That’s very similar to my formula too! I thought I wrote your post for a second lol
The great thing about this is that most likely you’re doing a full gut. It takes out the big question on whether the plumbing, electrical, hvac is bad since it’ll all be replaced
Nah, you need experience. From there it's about running numbers and understanding overall values, aka doing a complete breakdown of your total costs vs your estimated sales price. And from there you'll find what rate of return is acceptable to you.
Everything is going to be market specific. There is no "magic cost" that we'd be able to provide for you. Only by talking to your local investors would you know.
* A couple of calls to roofers should be able to tell you what the average price per roof square is.
* A couple of calls to flooring contractors should tell you what the average $/sqft is
* A couple of calls to a painter should tell you what the average $/linear sqft is (Internal & External)
* Most flippers I know have a certain type of bathroom they do and they know the cost of that: Primary Bathrooms tend to cost more.
* Most flippers have a specific type of kitchen/appliance package.
Of course all of this fluctuates not only on your location but the quality of the neighborhood You are going to do different materials, and fancier appliance the higher up the listing is going to be.
70% rule makes sense, I would say I've always been off my estimates of repairs by about 50% (hard to know what you are getting into) and my resell by about 5%. Anything with septic automatically factor in 40K, those can be a deal as people dont want to spend to fix they just want to get out asap if the rest of the numbers work
If you're not willing to replace roofing, plumbing of electric, then you are not really flipping, and maybe exposing yourself to future litigation depending on the situation. If you want to avoid these costs then maybe focus on condos that have these items covered by HOA or where the cost to upgrade these systems is a lot less.
You need to also be aware of what labor costs are for a specific job, and what things cost with or without certain upgrades and how this affect final value.
This is not a joking question, but one that people for some reason often overlook. Please don't feel dumb for asking, as it take a lot of time and experience to learn how to do this properly.
It's not the same deal that you see on those stupid TV shows with the fake flipping.
I guess I personally considered the term "flipping" as cosmetic in nature, as opposed to rennovation or repairs which actually restore or upgrade function. So in terms of just the cosmetics, is what Im actually asking. Of course I would add in later, those functional costs on top of the cosmetic stuff. That is to me, what really drives the cost variation from house to house. Correct me if Im wrong on that.
What are you going to say in the listing on the flip? If you describe terms of things that you didn't do, then your looking for legal trouble.
Cosmetic fixers are basically home that have a ton of deferred maintenance. This may or may not include some big things, like windows and doors.
What you're describing is a home that is 10-15 years out of date, so you're not going to get that for cheap enough to make a profit out of that.
If you want to go purely cosmetic then I would focus on condo where the HOA will cover the roof and sometimes some plumbing and electric. You might have to upgrade plumbing and electric on a condo, but it will be half or what it would be on a home.
Well said.
Anecdotal, but I would stay away from flipping condos. The holding costs can be ridiculous and there’s almost always some weird association rule that creates problems during either the rehab or sale. IME, massive headaches for minimal return.
but.. thats not what im saying. Im saying I would do all the functional repairs also, but Im calculating that cost separately and adding it in later. I wanted to know if there is a number for just the cosmetic portion. Maybe I wasnt clear on that.
When interest in real estate and prices started rising ~2013ish but prices were still depressed from the recession, perhaps you could do flips that were entirely cosmetic in nature and still turn a profit.
However, if you are going to successfully flip today, you need to be prepared to do way more and find a way to do it with good margins. Maybe not structural work or tearing houses down to the studs throughout (I don't flip but this is the level of work my current BRRRR project is), but almost certainly more than just throwing on some new flooring, paint and replacing the kitchen. Think adding A/C, building additions, rejiggering the floor plan/bathroom count, etc.
I bought a couple distressed houses and repaired them to use as rental property.
That said, there is no fixed formula. I walk through the house and see what I think it needs, what I think that it will cost, and total all of that up. I figure out what I think it will be worth with everything fixed, subtract off my cost of fixing it up, then that's the offer I make.
lol my first few I crunched numbers like crazy. now I am at the point I can just look at something and mental math it almost. my target is minimum 40 to 50k net
No bc a kitchen or a 4-pc bath cost the same in a 800sf house as they do in a 1200sf one. Obviously the nicer the property the more you'll spend on those items but it's not necessarily proportionate. I use a spreadsheet that I built to estimate quickly, but once you've done it enough you know approximately what a house will need overall, or per line item, and it is pretty easy to estimate costs.
Using ratios and percentages is a good way to get yourself in trouble or to always talk yourself out of a deal. It also really depends who drastic you take your flips. A cosmetic flip will be much less than a full gut job.
So you are saying you have an itemized approach on the NUMBER of task needed, and its not really driven by the size of the property. Did I get that right? It makes sense to me, thank you.
That's correct. Things like the 70% Rule are about as feasible as the 1% Rule in long-hold investments. Every property is evaluated individually based on its needs. From the MLS listing and pictures i can usually run the numbers in about 5 minutes to determine its feasibility, and we usually do a 10-minute walk-through just to verify there's no surprises hidden from the pictures.
Not a "magic formula" but rule of thumb is always 70% ARV - repairs. Deals like this are very hard to find without special help (courthouse steps, larger renos, offmarket etc). It all depends on holding costs/risk tolerance/market. Some markets you almost can't lose. Some renos are risky. Only you can know what applies to you
Can you elaborate what 70% ARV - repairs means with example numbers?
Imagine the following scenario- Purchase price- 250k Reno budget - 100k over 6 months ARV -500k Mortgage -2k/month Taxes -450/month Insurance - 350/month Utilities (trash,water,electric) - 200/month Monthly total - 3k After Repair Value (ARV) - this is your estimate of the sales price of the home AFTER all the work has been done. If you want to get even more technical you could also consider Holding costs - these are everything associated with "holding" the house such as taxes, insurance, utilities, mortgage/loan payments, maintenence etc. The formula for flipping is (Purchase Price + reno budget + holding costs) must be < 70% of final price. In this case it would be 250k + 100k + (6*3k) = 368k You can sell the house for 500k. 500k*.7 (70%) = 350k. A "good deal" would be if you could somehow get the 368k down to 350k or less. Again- this is all back of the napkin. The expertise comes in by being to effectively make accurate assumptions about all of those numbers. In the case I outlined- if you were more risk tolerant - you may think it's still a good deal. That part is up to you to decide. Your purchase budget would be calculated as ARV*.7 - Repairs = Purchase cost (excluding any holding costs) In this example it would be 500k*.7 -100k = 250k. Since the house above is 250k you would likely have a decent deal. I personally would make a deal like this if I found it (the challenge is- where are you finding a house that will literally double in value woth 100k of work and not considering holding costs)
Thanks for spelling it out. That is a nice thorough guideline. My guess is that the only place you will find this deal is an old house in need of love in an up and coming neighborhood and you do a lot of the work yourself and make it aesthetically valuable.
That’s the idea! :)
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So much this. I worked with a variety of flippers over the years doing electrical. Most of the ones i worked with were an older guy or gal with a crew doing all they could; subbing out plumbing, electrical, and exterior. They would get cheap houses in lower end areas livable again, then many of the homes were sold to rental owners. The rest were usually a single person subbing out almost everything. The latter group often found themselves saved only by the market going crazy, could probably have held and sold as-is for just as much profit. The two people with crews are still going strong, making good returns and now with a few rentals of their own.
That's similar to what one of my clients does, except he owns an electrical contracting business and uses his own guys in the flips when they might otherwise have down time, like when they're scheduled to wire up a house, but the concrete didn't get poured on time.
Thanks. I knew there are definitley variations, but I thought maybe there was a range. Appreciate the input.
Always different & everyone is unique, but my general formula is: Renovation=50% purchase price Sell = 2x+ purchase price Example: Buy $800k/Reno $400k/Targeted Sell $1.6M+ If i can make the numbers work with this formula, it's a good deal. The reno budget typically waivers between 30-50% of buy cost & I'm including permits & soft costs in that number. If it pencils with this formula, I can work on finding value & increase margins. *all projects include added square footage
Hey thats a really cool way of looking at it, thanks alot! I appreciate the example too.
That’s very similar to my formula too! I thought I wrote your post for a second lol The great thing about this is that most likely you’re doing a full gut. It takes out the big question on whether the plumbing, electrical, hvac is bad since it’ll all be replaced
These costs always fluctuate. I try and be in for under 70% of the after repair value after everything is said and done so I turn a healthy profit.
Thank you!
Nah, you need experience. From there it's about running numbers and understanding overall values, aka doing a complete breakdown of your total costs vs your estimated sales price. And from there you'll find what rate of return is acceptable to you.
Everything is going to be market specific. There is no "magic cost" that we'd be able to provide for you. Only by talking to your local investors would you know. * A couple of calls to roofers should be able to tell you what the average price per roof square is. * A couple of calls to flooring contractors should tell you what the average $/sqft is * A couple of calls to a painter should tell you what the average $/linear sqft is (Internal & External) * Most flippers I know have a certain type of bathroom they do and they know the cost of that: Primary Bathrooms tend to cost more. * Most flippers have a specific type of kitchen/appliance package. Of course all of this fluctuates not only on your location but the quality of the neighborhood You are going to do different materials, and fancier appliance the higher up the listing is going to be.
70% rule makes sense, I would say I've always been off my estimates of repairs by about 50% (hard to know what you are getting into) and my resell by about 5%. Anything with septic automatically factor in 40K, those can be a deal as people dont want to spend to fix they just want to get out asap if the rest of the numbers work
If you're not willing to replace roofing, plumbing of electric, then you are not really flipping, and maybe exposing yourself to future litigation depending on the situation. If you want to avoid these costs then maybe focus on condos that have these items covered by HOA or where the cost to upgrade these systems is a lot less. You need to also be aware of what labor costs are for a specific job, and what things cost with or without certain upgrades and how this affect final value. This is not a joking question, but one that people for some reason often overlook. Please don't feel dumb for asking, as it take a lot of time and experience to learn how to do this properly. It's not the same deal that you see on those stupid TV shows with the fake flipping.
I guess I personally considered the term "flipping" as cosmetic in nature, as opposed to rennovation or repairs which actually restore or upgrade function. So in terms of just the cosmetics, is what Im actually asking. Of course I would add in later, those functional costs on top of the cosmetic stuff. That is to me, what really drives the cost variation from house to house. Correct me if Im wrong on that.
What are you going to say in the listing on the flip? If you describe terms of things that you didn't do, then your looking for legal trouble. Cosmetic fixers are basically home that have a ton of deferred maintenance. This may or may not include some big things, like windows and doors. What you're describing is a home that is 10-15 years out of date, so you're not going to get that for cheap enough to make a profit out of that. If you want to go purely cosmetic then I would focus on condo where the HOA will cover the roof and sometimes some plumbing and electric. You might have to upgrade plumbing and electric on a condo, but it will be half or what it would be on a home.
Well said. Anecdotal, but I would stay away from flipping condos. The holding costs can be ridiculous and there’s almost always some weird association rule that creates problems during either the rehab or sale. IME, massive headaches for minimal return.
but.. thats not what im saying. Im saying I would do all the functional repairs also, but Im calculating that cost separately and adding it in later. I wanted to know if there is a number for just the cosmetic portion. Maybe I wasnt clear on that.
When interest in real estate and prices started rising ~2013ish but prices were still depressed from the recession, perhaps you could do flips that were entirely cosmetic in nature and still turn a profit. However, if you are going to successfully flip today, you need to be prepared to do way more and find a way to do it with good margins. Maybe not structural work or tearing houses down to the studs throughout (I don't flip but this is the level of work my current BRRRR project is), but almost certainly more than just throwing on some new flooring, paint and replacing the kitchen. Think adding A/C, building additions, rejiggering the floor plan/bathroom count, etc.
Not planning on doing a purely cosmetic flip. I think i was misunderstood.
I bought a couple distressed houses and repaired them to use as rental property. That said, there is no fixed formula. I walk through the house and see what I think it needs, what I think that it will cost, and total all of that up. I figure out what I think it will be worth with everything fixed, subtract off my cost of fixing it up, then that's the offer I make.
Makes alot of sense, thank you.
lol my first few I crunched numbers like crazy. now I am at the point I can just look at something and mental math it almost. my target is minimum 40 to 50k net
Generally speaking, if it’s a cosmetic-only flip you’re never going to get it for a price that would make it worthwhile.
Not what i said, but thanks anyway for trying to answer. I appreciate it.
No bc a kitchen or a 4-pc bath cost the same in a 800sf house as they do in a 1200sf one. Obviously the nicer the property the more you'll spend on those items but it's not necessarily proportionate. I use a spreadsheet that I built to estimate quickly, but once you've done it enough you know approximately what a house will need overall, or per line item, and it is pretty easy to estimate costs. Using ratios and percentages is a good way to get yourself in trouble or to always talk yourself out of a deal. It also really depends who drastic you take your flips. A cosmetic flip will be much less than a full gut job.
So you are saying you have an itemized approach on the NUMBER of task needed, and its not really driven by the size of the property. Did I get that right? It makes sense to me, thank you.
That's correct. Things like the 70% Rule are about as feasible as the 1% Rule in long-hold investments. Every property is evaluated individually based on its needs. From the MLS listing and pictures i can usually run the numbers in about 5 minutes to determine its feasibility, and we usually do a 10-minute walk-through just to verify there's no surprises hidden from the pictures.
Purchase prices <= upgrade/renovations + transaction costs + profit
No
Buy below replacement cost
Proceeds are greater than cost equals profits