Hi, there. I am researching flipping market and i can divide it on 3 segments:
1. rehab - when someone gets ugly or under condition house, puts a small money to get condition shortly and sale it as soon as possible - a small profit, high dependence on purchase price. in this case we earn on buying.
2. improvement - getting old or cheap house, puts more money to get more expensive house which we can sale for high price and get more profit. in this case we earn on buying and improvement to get highest price among around houses in that location
3. re-building or building new one - when we destroy old and build new house. in this case we earn more profit when get something absolutely new with highest price. Obviously, it takes more money and time since purchasing to sale, but i guess it may be more profitable.
My question is:
I read the main rule on rehab market is 70% rule, but i assume on improvement and re-building segment there are another rules, because we can get price above average market price.
Can someone give a couple comments about this?
@Alexey Krol On #3, you spend and get 30-50% profit of the selling price, on #1, you buy at 75-80% and hopefully profit 5% (in LA). #1 and #2 is the same.
@Alexey Krol , when I hear "improvement" vs. "rehab", they mean just the opposite to me as you've described them. I see improvements as being more minor work, perhaps requiring less skill (e.g, cosmetic improvements like carpet and paint) and rehab as being a project being truly rehabilitated and much more involved. But hey, it's just nomenclature so I wouldn't get caught up in the semantics.
As far as the 70% rule goes, it is very much just a quick rule of thumb for a down and dirty analysis and varies by a variety of things, not the least of which is the value of property.
Regardless of what the project entails, it's prudent to run actual numbers to evaluate the opportunity and see that it meets your criteria.
Thank you so much.
I agree 70% rule is kind of simplification, but finally i see the main difference between flipping and building is that while flipping goes you earn money on buying with cheapest repairing, but while new development/deep rehab goes you earn money getting adding value for highest market price comparing of rounded properties in this location.
For example, theoretically I can buy old house for 70% of market and I can have at least two scenarios:
1. To make a small fixing to sale 95-97% below the market - and finally to get from 3-5% of net profit
2. To make new house and sale 200-300% above the market. Naturally it depends on kind of actual project from just better house to luxury unique house if this is acceptable for this location. And I can hope to get 30 - 200% of net profit
My opinion that new building of expensive unique property is more profitable than simple flipping. And to do this, good location is more critical factor than price of buying?
Could i ask you to take short time for my shortest survey:
Nobody really makes 200%, if you are thinking building a house at $80/sf then selling it at 240/sf, then obviously you are not computing everything, land, loan costs, permits, zoning, tap fees, school district, fre dept fees, etc.
Believe me, I keep it in my mind)))