# Profit Margin

Starting Out 17 Replies

I am trying to determine if there is an industry standard profit margin for real estate investors. Is there a standard percentage of profit that you look for when evaluating a deal?

i.e. When evaluating a deal, always look for at least a 30% profit that can be reinvested back into your business, etc.

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It used to be that you could buy a property for (After repaired value - cost of repairs) * 70% but now with the economy the way it is, it is more like 60%

Jeff alludes to the 70% of ARV rule of thumb. That says if you buy a fix and flip property, where purchase price plus rehab costs are 70% of the ARV, you hold it for six months, and you use hard money, you'll make a profit of 10-15% of the ARV after all costs, but before taxes.

Because values are falling, and seller concessions are needed to make a retail deal, you have to do better today.

On a rental, a good goal would be to have \$100 per unit after all expenses and the P&I payment.

A cash on cash calculation is another way to evaluate a deal. Total cash returned for the deal (fix and flip) or a year (rental) divided by the total cash invested. But, that gets meaningless if you have only a small amount of cash invested.

But "profit margin" isn't very meaningful. Even for a retail business, profit margin has multiple meanings. What do you mean by "profit margin"

Jon Holdman, Flying Phoenix LLC

Here is an example:

ARV = 120K
Selling Price (after rehab) = 100K
My profit (30%) based off 100K = 30K
This means that all other costs (purchase price, closing, holding, repairs, seller concessions, etc, etc) must be 70K or less in order for me to take this deal.

I would like to know if my 30% profit margin is in line with the industry standard.

Erika,

Your 30% profit would be high if compared against the industry standard (the standard would be based on a very large number of flips). On any given deal, you have the potential for a 30% profit, but the average profit should range around 10-15% on average.

IMHO, 30% profit deals do not happen all that often. But, it also depends on your business model. If you are a part-time investor who can afford to cherry-pick deals, then you could have the luxury of only doing deals with your 30% profit margin. But if you are going to be flipping (rehabbing) full-time, your margin will likely need to revert to the mean in order for you to have enough deals coming in to sustain your business through cashflow generated by flips.

Owen D., ODD Properties, LLC | http://www.sellmyhouseinomahafast.com

I'm with Owen. 10-15% of ARV, pretax, is about normal for a fix and flip. You'll burn 15-20% of ARV on all the costs. So, to get 30% as profit, you'd need to have buy plus rehab costs around 50%. Trouble is everyone is looking for those deals.

Jon Holdman, Flying Phoenix LLC

I agree with the Jon & Owen.
Great if you can get 30%!

For my rehab to retails I normally shoot for 15-20% of ARV as long my repair estimates aren't over 20% or so of ARV. That leaves 10-15% for resell and holding costs if I'm using the 70% of ARV minus repairs formula. I normally run 10% in resell/holding if everything goes well and 15% if everything doesn't.

I've recently adjusted it down to 65% of ARV minus repairs which gives me a solid 20% of ARV for profit even with let's say additional holding time or seller concessions when I sell.

Now If I'm having to put in more than 20% or so of the ARV into repairs, let's say 30K in repairs on a 100K house, then I'm going to be looking for a higher profit margin (20-25%) or its just not worth the risk to me.

More money out of pocket = more profit potential

I do know some rehabbers that like getting out of a deal what they put in. Let's say you have \$15K out of pocket then they want \$15K in profit. This is a solid strategy for protecting yourself with your risk/reward ratio on bigger projects, but it doesn't always work on properties that need little in repairs. Being \$5K out of pocket on a \$100K house doesn't make sense for \$5K in profit, but setting up a minimum profit percentage would alleviate that issue.

Awesome advice. Thank you all for giving me your input. I think I have a pretty good idea of where i stand and where I need to be in order to be competitive in my market. This will definitely help when I evaluate future deals!!
Best of luck to all!

Actually, I do have one more question for those who responded. Do you calculate labor into your repair costs or do you absorb the labor and consider your profit part of the payment for your labor (i.e. you do your own work).

I count labor into my cost. Also from the panel, I am just curious on where individuals are buying properties if you can not find them at 50 cent on the dollar.

Are you staying in these plush areas that you feel comfortable or are you truly going to areas where you can hit that target goal.

Because what I am hearing is that ARV \$100k you can not purchase this property for 50k and I would definitely disagree with the panel on this one.

Some who BUYS not FLIPS and BUYS right hone in on this one. See I am laughing because everyone is a wholesaler now and everyone wants to buy and flip, but you very seldom here about those in todays market buying and holding. Let's put some figures out here.

I just bought about 4 mths ago a home 3 bd 1 ba on a little over an acre. I paid 13k and I will send the HUD to anyone who wants to see it. Just PM me. The home is not a junker it is where my strength in real estate is and that is marketing. The home has new windows and is in on a scale of 1-10 a 7. The home is worth 98k and I have had to put 15k into it. I will send photos to ALL THE NON BELIEVERS.

I am just trying to understand that if the market is so good for BUYING, why can't you find the 30%-40% deals. If you are doing what OTHERS are not willing to do then you will get the results that others do not.

Sorry did not mean to burst any bubbles on this thread, but if you are new and do not understand the industry in the full thereof then you need to heed the advice of the forum, but ONE of you pls COMMENT on this that everyone is looking for deals at 50%. I do not even look at deals unless I can LEGALLY STEAL them.

Time and Circumstances.

Well Douglas, I do buy to wholesale and to retail, but I also buy for long term rentals and notes.

Buying at a straight 50% of ARV is very doable if you are including repairs into that. Let's say its a \$100K ARV house and you are taking 65% of ARV minus \$15K in repairs then you are at 50%.

I made a \$30K offer yesterday on a house that has a \$75K ARV and it needs \$13K in repairs, so I could say I'm trying to buy it at 40% of ARV but the repairs are what put me there.

Bottom line is I don't think that buying for a 50% profit margin is a realistic standard to be looking to buy multiple houses at unless you are in a very depressed market.

Douglas, I had a discussion about this today with a guy I work with. The issue I have with the idea that you can buy properties at 50% ARV is that the market determines the value. A house is only worth what someone is willing to pay for it.

Sure, you can buy properties well below what an appraiser, realtor or investor says it is worth. However, can you sell it for that amount? If you base the price on what the property was worth two years ago then getting it at 50% is not surprising. If you hold it for 2-3 years you may be able to sell it for an amount close to the 2006 prices.

As investors we like talking about ARV and how we can buy properties well below it. Unfortunately, if no one would buy it at the ARV then the ARV really doesn't mean anything.

After Repaired Value (ARV) is what it will sell for NOW all fixed up. ARV is factored off of current comparables, and the current market must be factored in. If you are utilizing 2 year old comps for your current ARV then you are not really using comparable sales and you don't have an accurate ARV.

Thought I'd chime back in here as well... Profit margin also has nothing to do with what percentage of ARV you are buying the property at. You could buy an absolute wreck with an ARV of \$100K for \$40K (40% of ARV), but you might have to put \$40K into it in order to sell it. Then you would be left with 20% profit margin which would be further eroded by acquisition, holding and selling costs...

I just bought a REO at 50% of ARV, but that doesn't mean my profit margin is 50%. After factoring in buying, holding, rehab and selling costs- my profit margin will be approximately 15-20% of the sale price before taxes. Unless I misunderstood what Erika was asking, she was interested in profit margin concerning flips- not what % of ARV you could buy a house for...

According to Homevestors (who have done over 1000 flips), total profits usually fall in the 10-20% range of the eventual selling price. But again, that's not to say you couldn't do better if you are only flipping a small number of houses a year- it's just the industry average.

Owen D., ODD Properties, LLC | http://www.sellmyhouseinomahafast.com

I believe that you have a point, Calvin. Bronchick likes to say "a house is its own best comp". On the other hand, houses are expected to have certain features like function furnaces, kitchens and baths. Its one thing to say a kitchen remodel returns 90% of your investment. That's for replacing a functional but dated kitchen with an up-to-date one. Replacing a non-functional junk kitchen with an up-to-date one will return much more than 100% of your investment. So, yes, it is entirely possible to buy a house for 50% of what it would sell for after being fixed up. My last purchase was \$61.5K. I put about \$16K into it, and it appraised for \$119K. Not sure I could have sold it for quite that much but there are numerous nearby houses listed for more than that.

There's a huge discuont created by poor condition. Banks seem to think they can just discount by the amount of the repairs. But rehabbing money is harder to come by for most buyers than purchase money. Buying a \$100K house with 10% down means about \$12K out of pocket and a \$90K loan. Buying the same house for \$85K with \$15K in repairs means \$25K out of pocket and a \$76.5K loan. So, the house that needs work is worth significantly less than \$85K.

Further, at some point you cross the boundary of what can even be funded with conventional financing. That's further limits your buyer pool and sinks the price even further.

Jon Holdman, Flying Phoenix LLC

I guess my question is are the rehab costs part of the ARV or do you subtract the repairs after the ARV

your ARV is whatever the market can bear aka the price the house will sell for after rehab. Take your ARV subtract the cost of the house and rehab. But really you should be subtracting your all in price that includes holding costs, closing, points, etc.

Also keep in mind this thread is 7 years old...