I have been more focused on rental properties vs. flipping but my wife would like to flip and I have a construction background so it make sense for extra money to put into rentals.
The question I have is when do my calculation I am finding the flip calculator gives me one number and the 70% rule a very different number. I know the 70% rule is a "rule of thumb" but I want to make sure I am not missing anything.
So MOA = 255k x .7 - 20k = MOA of 158,500
However the BP calculator says 195k is the MOA whichlooks like this:
Financial Summary for Flipper
|Purchase Closing Costs:||($2,500.00)|
|Total Rehab Costs:||($20,000.00)|
|Monthly Holding Costs:||($1,276.00)|
|Total Days Held:||180|
|Sales Price After Fix Up (ARV):||$255,000.00|
|All Selling Closing Costs:||($2,500.00)|
|Real Estate Agent Fees:||($6,375.00)|
|Total Profit for Flip||$20,000.00|
Flip Hypothetical Profit If Held For...
|45 Days||90 Days||270 Days|
What am I missing? Why are they different?
The "70% Rule" is for those who have already decided that they want a 30% spread between what it's worth, and what it costs them. In your example, ARV x 70% gives a difference of $76,500. If you put THAT figure in the "desired profit" column, I reckon you'll find that the numbers will line up both ways.
ie. If you use a DIFFERENT way of coming up with your expected profit, you're NOT going by the 70% Rule.
(But so what? No-one should be saying the 70% Rule is the be-all and end-all Rule, right?)
Nonetheless, I do reckon that ONLY expecting a $20k profit means: you're cutting it very fine if something goes wrong!
@Brent Coombs and @Jason DiClemente or any others. What is a good profit margin I should be aiming for on a 200k property? I know there are many variables in my question like the size the home other risks, locations, etc. This one in particular is a rural area. Meaning the major city is 20 miles from here in the city I live in which is around a 40k population but even this is in rural neighborhood with very spread out lots and 2-3 acre pieces of land.
Hope that helps answer my question.
Thanks again for the help!
@Jeremy Karja , as I've already suggested, being satisfied with an expected profit of $20k (only) means you'd be anticipating risking NINETY percent of its theoretical value.
But, I haven't heard any talk of a "90% Rule" being encouraged on BP, and I daresay, neither should it be.
I HAVE recently seen a "Flip or Flop" episode where the fellow paid $900k, and they knew they'd probably have to put $150k extra into it, where the comps were $1.2-1.3M. So MAYBE a 10% spread can work SOMETIMES, but, you'd better have deep pockets to begin with, AND be already very good at flipping! [Yes, they survived the dramas that time].
The main thing about that episode was: the comps were VERY well known and established; a gated community.
Whereas, a "rural neighborhood with very spread out lots and 2-3 acre pieces of land" might be HARD to comp!
My own thoughts about such buys is: what OTHER exit-plan / investment-strategy might work?
eg. If it fails to sell for a profit, would it RENT well? How would THOSE returns look? [Get my drift?] Cheers...
Great tips @Brent Coombs and makes perfect sense, thank you again!
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