Calculating profit after flip sells

13 Replies

So this seems like a very noob question but I am having a serious brain fart here.  Almost embarrassed to ask this!

I just sold my second flip and i'm trying to calculate the exact profit amount.  I've crunched the numbers several different ways (including the BP flip calculator) and always get a different number.  They are all within about $2000 which is a pretty big swing I think.

I have 2 HUD's (buy and sell), rehab costs and holding costs. Is there anything else I need to factor in?

I think my confusion is in the taxes and closing costs in the HUD's. Some of the rehab cost was also buried in the loan and some was paid by me.

I'd be happy to share the HUD's and numbers with someone who can help me!

Your profit is ultimately the combination of every penny that left your account and every penny that got put back into your account.

The purchase HUD probably involved writing a check (money leaving your account). Then, there was all the money you spent throughout the project (rehab costs and holding costs). At sale, you likely got a check (money entering your account). Just add/subtract it all up, and that's your net profit before taxes.

In terms of the tax confusion, you likely either paid or were paid excess taxes when you purchased (pro-rated, depending on where in the tax cycle you were), and then either paid or were paid a pro-rated share when you sold. Add up how much you paid and/or were paid for taxes on the two HUDs, add in any other tax payments you may during the project, and that is the total amount you paid in taxes. But, unless you made a tax payment during the project, it was probably all rolled into the HUD totals, so you don't need to break it out just to determine your profit.

Btw, in the future, you should consider using an accounting program (QuickBooks or Quicken, for example) or at least using a spreadsheet to track all your expenses.

Thank you @J Scott.  I obviously over complicated it.  I have everything on a spreadsheet currently.  Need to start looking at something a little more advanced though.

Here's what I came up with.  This is all the money that went out and all the money that came back.

Also @J Scott, I listened to the podcast you did with @Joe Fairless yesterday.  You provided some great information and things to think about!

@J Scott - I'm going to piggy back this topic - When you and other experienced rehabbers say you're targeting a certain profit...is that before or after paying income tax?

The BP Flipping Calculator doesn't have a spot to accommodate for income tax ...so in the example from @Tim G. above where he made a profit of $24,000...his real profit after paying the income tax (as well as the 15% self employment tax) would be closer to $16,500

Am I looking at this correctly?

Originally posted by @James Masotti :

@J Scott - I'm going to piggy back this topic - When you and other experienced rehabbers say you're targeting a certain profit...is that before or after paying income tax?

The BP Flipping Calculator doesn't have a spot to accommodate for income tax ...so in the example from @Tim G. above where he made a profit of $24,000...his real profit after paying the income tax (as well as the 15% self employment tax) would be closer to $16,500

Am I looking at this correctly?

I personally don't like to factor tax burden into my pro-forma analysis.  The reason is that everyone's tax situation is different, so a pre-tax $50K profit for one person could look very different to a pre-tax $50K profit for another person.  For example, one person may have a $50K loss in another business they own, so they may not owe any tax on their $50K profit.  And another person may owe $200K in back taxes to the IRS, so they could lose the entire $50K of profit to the IRS.  

Because no two people have equivalent tax situations, I don't think factoring tax into the equation makes sense.  Even if I'm just doing the analysis for myself...

As an example, let's say I buy a property on January 1, sell it on January 2 and make $10K profit.  How much do I now owe in taxes on that $10K?  In theory, probably $0 -- if that's the only money I make this year, my marginal tax rate on that $10K is 10%, but after standard deduction and other credits, I'm probably not going to owe anything.

Now, let's say I buy that exact same property on December 30, sell it on December 31 and make the same $10K profit.  Now how much do I owe on that $10K?  Well, it could be as much as $4000, if all the income I've earned throughout the year has put in in the highest marginal tax bracket (39.6%).  

So, do I do my analysis assuming I'm in the 10% tax bracket, the 39.6% tax bracket or somewhere in between?  You could say that I should use whatever tax bracket I expect to be in that year, but as many investors will tell you, it can be hard to know.  Especially for people like me who have several businesses, and who use different types of tax shelters to that can have hard-to-predict tax implications (at least early on in the year).

For those reasons, I like to ignore tax implications in all my analysis, and assume worst case -- that I'll lose about half of my income to taxes.  When the numbers are better than that -- either because my income was lower or my tax shelters were better -- so be it.  But, at least I was conservative in my analyses...which is what I always strive to be.

@J Scott - Awesome response. Unfortunately I can only vote it once.

I also don't include taxes because of many of the reasons @J Scott mentioned but also other reasons such as FICA and state tax, it gets pretty complicated as j implies.  However,  I will add for someone deriving their entire income from flipping it would probably be useful to calculate the taxes.

@Cal C. Thanks!

Sounds like it's pretty safe to say when someone says they are targeting no less than $20k profit for a flip then that they are most likely referring to gross profits

Could someone clarify where the profit is? The costs are higher than the resale check.

Originally posted by @Scott Jones :

Could someone clarify where the profit is? The costs are higher than the resale check.

 i purchased this property with a mortgage that included rehab costs.  So the numbers shown above are not all the numbers, just money that actually went in and out of my bank account.  Actual numbers were $185k resale, $100k purchase.  The rest of the numbers are above. 

@Scott Jones , when running through the numbers it looks like the "rehab loan" is actually counted as a credit to the equation. There must be some reason why, but nonetheless, the rehab loan and the resale check both count as credits so the profit would be the difference between those figures and the other noted expenses.

Thanks. That makes sense now.

Originally posted by @Pat Giblin :

Scott Jones , when running through the numbers it looks like the "rehab loan" is actually counted as a credit to the equation. There must be some reason why, but nonetheless, the rehab loan and the resale check both count as credits so the profit would be the difference between those figures and the other noted expenses.

My guess is that the rehab costs were draws taken from the lender (i.e., money received), thus it was denoted as a credit on the spreadsheet.  I'm also guessing that the purchase costs were $30K higher than the actual purchase price, as those rehab costs were rolled into the loan.

Obviously, this isn't how you do the formal accounting, but adding and subtracting all the inflows and outflows should certainly give an accurate determination of the profit.

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