We're in the Cleveland market looking at buying SFH's to flip. For those with experience doing rehabs, what's your target profit margin you look for in evaluating deals?
We've been going for a 20% profit off sales price but the markets pretty tight and when analyzing properties we typically don't think we'll be able to achieve those targets without asking for $10K or less than the listing price, which sellers aren't willing to bit on.
We're trying alternate forms of finding properties (driving for dollars, tax delinquent lists, and auctions) as well. But for anyone with experience doing rehabs through the the MLS, what's the target return you go for when buying a house? Any recommendations on how you modify your plans during a seller's market or how we should be thinking about this? I understand some profits is better than no profits but we don't want to tie up too much cash and time in a 6 month project that isn't going to move the needle much for us.
Thanks for your help.
Here's an example:
Property is listed at $65K. We think we can rehab it for $40K (including holding costs and closing costs) which would make total cash needed at $105K. We estimate we can sell it for $120K, making a $15K profit.
However, a 20% return on $120K is $24K, so to achieve that target we'd need to buy the house for $56K instead of $65K, which hasn't made us very successful so far.
I was going to mention what Jason said, no closing costs in/out, commission, utilities, taxes?
I agree with @Jason DiClemente regarding profit margin. My minimum is $20k on paper (before taxes). Taxes will be based on your tax bracket and you may possibly be paying self employment taxes as well, so until you speak to your CPA and file, it might be tough to accurately determine the taxes. As far as the other costs, I see you noted closing and holding costs into your $40k rehab budget. For holding and closing costs you will probably be in the $12K range if buying cash. If taking a loan out it could be higher than that, maybe $15K or more. So long as you have a solid budget for that, you should be good.
As far as properties being listed higher than you are able to offer... that is normal. I have put in tons of offers below asking price (where my numbers need to be). Most of the time another higher offer comes in. Stick with it and always stick to your numbers.
@Luke Terry That is the inherent problem with rules of thumb. I know a successful rehabber who shoots for 20k min profit. But this applies to his 120k product and his 240k profit. Twice as much money is risked on the latter for the same return. And as a percentage it is much lower.
Targeting a return percentage may not work as you look at higher end houses as well, the market may not easily give you 20% on a 350k house.
Or at least either of these targets may not work off mls properties, or often enough to keep you constantly working. It depends on required volume as well as target price point.
You will probably develop a model and then find it doesn’t exactly apply when you reach into a different class/city. That doesn’t mean it doesn’t have value to you though.
Some people wouldn’t touch a house for 10k net, others would be happy for the opportunity. It really depends on where you are and what your goals are.
I think the profit margin you should demand depends on if you are going to be hands off or if you'll do most of the work yourself. "If" I was hands off I would accept a lower profit as long as it got me something above 15%+ Net ROI on a project I didn't consider risky. I'm hands on myself and I have a business partner so I have to demand a much higher profit margin for my time, energy, and literal blood, and sweat to make it worthwhile split 2 ways. A lot of flippers are paying more for houses than I think makes sense then cutting corners on the job to save their way into a profit. I see some really shoddy work being done and it makes all flippers look bad.
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