Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
9y
ROI is Return on Investment, @Account Closed , not Return on Interest as you state in the title. There are only about a million ways to calculate it but generally, it's:
ROI=Net Profit or Loss/Amount Invested
Either way, I don't believe this is an appropriate way to evaluate a flip.
Getting money after you have a number of flips under your belt can be fairly easy and all the higher volume and/or higher dollar flippers we know eventually run out of cash.
It's pretty common to obtain 100% financing for both the purchase and rehab funds after you've been doing this for a while. Borrowing, of course, is a two-edged sword, because your interest payments, especially for a hard money loan, can eat 25% to 1/3 of your profit. Nonetheless, many flippers will borrow as much as possible to do as many deals as they can and keep the pipeline full.
Obviously, the more you borrow the less your Amount Invested is in the formula above and the higher is your ROI. If you borrow 100% of the costs, your ROI will be infinite and it doesn't matter if your profit is $100 or $100k. Nor does the cost of the property enter into the calculation. That is, you wouldn't buy a million dollar property to make $100 even if that represented an infinite return on investment.
Similarly, merely stating you expect to earn a fixed minimum $20k to $30k on any flip doesn't make sense either since that could be against a $350k property or a Million dollar deal.
Instead, we use return on ARV to determine if a flip is a good deal or not. In our case, we define 10 to 12% of the ARV in profit as a good deal. For example, if a property with a $500k ARV looks like it will result in a $50k to $60k profit, we consider that fair. A $1M ARV would have to produce a minimum $100k to $120k. We won't do a loan if it does not look like the rehabber can earn a profit of at least 10 to 12% of the ARV.
This approach takes both your profit, in dollars, into account as well as the value of the property. It also takes risk into account because it predicts you'll make more on the higher value properties, where price swings, rehab overages, and appraisal discrepancies can be greater.
Real Estate Agent · Venice, CA · Member since 2015 · 182 posts · 125 votes
9y
I'm not a flipper, but I work with quite a few. Many have a minimum profit target of $20k - $30k if it's a smaller flip (PP $250-$450 range). Returns are getting pretty thin and many flippers are adding square footage to get the numbers to work. Some are going into rougher areas looking for deals.
Input from @Shawn Ward on his flips would be great.
Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes
9y
And i thought when i borrow money at 3% was not high. Does this mean that if i borrow 100k and pay 7-9% (14-18% annual) for 6 months and pay 7-9k flippers are happy? I could roll with that all the way lol.
Specialist · Toronto, Ontario · Member since 2016 · 564 posts · 425 votes
9y
I'm not in LA, but my market is likely similar in price points.
For most flips (without additions or major structural work), I aim for 10% of the purchase price in profit, before taxes. So if I buy a place for $500k, I would want to make $50k profit, which usually would mean a sale price around $700k.
This is my "quick and dirty" way of evaluating a deal, the length of the project, capital required, distance from me, and amount of renovation required can all increase that.
I'm in LA and when I analyse a deal I am looking to at least get 15% return on investment when all is said and done. Some of our deals have finished as low as 8% but we try to always stay in double digits.
We put a bit more into our rehabs with details and quality finishes, so it will be tough for us to get to 20%...but I'd be pretty happy at 15% on each one with a 5 month buy to cash-out time-frame.
Los Angeles, CA · Member since 2017 · 45 posts · 22 votes
9y
I'd say more than the city, it's the capital tied into the deal that distinguishes our goals for returns. For example, if we pick up a property for $300K and the total project cost ends up to be $400K and we make a $40K-$60K spread, why would we go to a pricier area and spend $1.5M on total project costs to make the same amount? It doesn't make sense to me from a financial stand point, but I understand many developers/flippers like particular products for their portfolio or want to stick with their respective pockets even if they have to marginalize. I'd rather do 3 or 4 of those smaller projects than tie up all that capital for one project that will profit the same amount as one of those smaller projects.
Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes
9y
Obviously you'll make at least 200k on a 1.5M project, and the same timeline! I don't quite understand why someone is happy with 40k profit on a 6 month project.
Investor · Los Angeles, CA · Member since 2016 · 12 posts · 8 votes
9y
Thank you to everyone for your replies!
@Nick Hedberg this is exactly the type of feedbacks I have received from my investors, typically the returns are around 8 to 12% net. A lot of investors are now buying in rougher areas like you said, South L.A mostly, Inglewood, Compton and Jefferson Park have been found a lot of interests lately!
And thank you for mentioning @Shawn Ward into this post, I totally agree with this strategy of spending a bit more into the rehabs and do some quality work.
@Luc Boiron Yes exactly, same feedback as well, how's the market in Toronto like? Have you been investing in Southern California?
@Josh Gorokhovsky I totally agree, it wouldn't make sense to spend too much money on a specific project if the returns are too low, it's a matter of risk / reward balance, the amount of time, money and energy that you are willing to spend on each project. Do you typically use Cash or Hard Money for the projects that you are working on?
Los Angeles, CA · Member since 2017 · 45 posts · 22 votes
9y
@Account Closed we have private beneficiaries that have their own investment criteria. So it depends on the project but for the larger projects we use one of our bennies. For the smaller projects, we use cash.
Investor · Los Angeles, CA · Member since 2016 · 12 posts · 8 votes
9y
Hi @Brett Goldsmith is this number Net? Can you give an example of projects that you've been working on just to have a better idea on how you can achieve this ROI? Wha types of deals is it usually? Short sale? I would love to have your input on it.
@Andrew S. That's awesome, how did it go? Did you end up buying one property this morning?
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
9y
Based on many of the responses, I can see why my market is so competitive! To make only 15% profit on a deal (which is an extremely active investment) I would rather be a lender and make 10%- 12% plus a couple points and be a semi passive investor.
Every deal in LA is different but from my standpoint and experience, I need o do major rehabs and most have additions to them in order to make the spreads I need to pay mybprivate investor sand make it worth my time, effort, and risk.
Most of my purchases are between $500k and $800k right now with $100k plus rehabs. They take about 6 months and I expect to clear at or over $100k on each. So my unleveraged returns are about 25% and my leveraged returns are around 100% annualized.
Investor · Los Angeles, CA · Member since 2012 · 1k+ posts · 500 votes
9y
Sure.
Here are some examples off the top of my head. I'd consider these some of the smaller projects in LA that we have done in terms of money invested and in profit being generated, but solid returns.
Done a JV with a homeowner where we put $150k and made $80k.
$35,000 acquisition in 29 palms and Est. $35,000 for rehab, holding costs. Sold for $115,000.
Acquisition $155k, Rehab, holding costs etc $37,000. Sold for $255,000.
Real Estate Investor & Consultant · Los Angeles, CA · Member since 2016 · 620 posts · 386 votes
9y
@Manolo D. one would be happy on $40k from a 6 month flip if he/she has 2 or three of those flips going at once. If you have 3 of those going at one time, you now have $120k in profit after 6 months.
Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes
9y
Shawn Ward just a waste of time and paperwork/stress. if you can afford three (say arv 400k each) at same time, capital wise, why not shoot for 1.2M and have 120k in 6 months, that will be worth it considering you need to be out about 400-500k in risk. If that were me, ill be concentrating on one project instead of running around figuring out what next like a headless chicken everyday. But then again, there are more lucrative and less stressful businesses if you have that kind of money. I handle projects all the time, it is challenging when there is too many work roaming around and lesser and lesser pool of good workers in LA. But to each his own, I don't see the point of being an investor if they only make 10-15% a year of whatever they take out of their pocket. You need at least 1.2M in liquid cash to lend if you want to live decently on being the bank. 10k a month less 35% taxes is just enough to pay bills.
Real Estate Investor & Consultant · Los Angeles, CA · Member since 2016 · 620 posts · 386 votes
9y
There are many ways to make money flipping @Manolo D. . Different models for different investors. I was just sharing an example of why someone would definitely enjoy $40k on 6 months on a single flip.
Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
9y
ROI is Return on Investment, @Account Closed , not Return on Interest as you state in the title. There are only about a million ways to calculate it but generally, it's:
ROI=Net Profit or Loss/Amount Invested
Either way, I don't believe this is an appropriate way to evaluate a flip.
Getting money after you have a number of flips under your belt can be fairly easy and all the higher volume and/or higher dollar flippers we know eventually run out of cash.
It's pretty common to obtain 100% financing for both the purchase and rehab funds after you've been doing this for a while. Borrowing, of course, is a two-edged sword, because your interest payments, especially for a hard money loan, can eat 25% to 1/3 of your profit. Nonetheless, many flippers will borrow as much as possible to do as many deals as they can and keep the pipeline full.
Obviously, the more you borrow the less your Amount Invested is in the formula above and the higher is your ROI. If you borrow 100% of the costs, your ROI will be infinite and it doesn't matter if your profit is $100 or $100k. Nor does the cost of the property enter into the calculation. That is, you wouldn't buy a million dollar property to make $100 even if that represented an infinite return on investment.
Similarly, merely stating you expect to earn a fixed minimum $20k to $30k on any flip doesn't make sense either since that could be against a $350k property or a Million dollar deal.
Instead, we use return on ARV to determine if a flip is a good deal or not. In our case, we define 10 to 12% of the ARV in profit as a good deal. For example, if a property with a $500k ARV looks like it will result in a $50k to $60k profit, we consider that fair. A $1M ARV would have to produce a minimum $100k to $120k. We won't do a loan if it does not look like the rehabber can earn a profit of at least 10 to 12% of the ARV.
This approach takes both your profit, in dollars, into account as well as the value of the property. It also takes risk into account because it predicts you'll make more on the higher value properties, where price swings, rehab overages, and appraisal discrepancies can be greater.
Investor · West Los Angeles, CA · Member since 2014 · 230 posts · 239 votes
9y
@Account Closed
We shoot for 15% to 20% per project. We sometimes don't hit that. The least amount of profit was 9.5%. The projects take from 6 months to a year depending on the scope of work. Average purchase price is from 850k to 1MM however we have one now where the pp was 2.7MM. As for investing in transitional neighborhoods, I think it's a good idea and there's money to be made in all neighborhoods. That said we concentrate on the west side of Los Angeles.
I currently have 2 projects going as an equity investor and my partner has 3 projects going right now.
Yes you need at least 1.2MM to make it as a full time income source. I am a private investor and still need to work a full time job as I can't live off the proceeds of my investments.
Investor · Los Angeles, CA · Member since 2016 · 12 posts · 8 votes
9y
Hi @Jeff S. Thank you very much for this very detailed answer, I appreciate it!
To compare with @Jeff S. answer, @Account Closed is your 15% to 20% per project calculated on the purchase price (including or not the repairs) or the ARV?
Flipper/Rehabber · Los Angeles, CA · Member since 2009 · 1k+ posts · 732 votes
9y
At 15% profit margins or less with a 6 month timeframe doesn't that put one at great risk if there is a market decline? 15% could get wiped out pretty quick.
If one is buying the rougher areas the risk could be greater as last time around those were the neighborhoods that declined the most and sat on the market longer in the L.A area.