Experienced flippers, what is your acceptable profit margin?

Question

I have a house I bought for $240K with the intent to fix and flip it.  I have gotten several bids and I found a reliable contractor who will do the rehab for $160K (not the lowest bid but someone I trust / he was referred from a friend who has done multiple flips with him) which includes a complete update as well as adding square footage and a garage.  Once done I think $525K is a realistic price.  My holding costs will be minimal because I paid cash for the property but I will be using an equity line for the remodel so I'll assume about $5000.  By my calculations, with this scenario I stand to make about $86K.

($525K [sales price] - $34K [commissions/closing costs] - $5K [holding costs] - $400K [total investment] = $86K)

In the worst case scenario, if I went over budget by 20% and sold for 10% less (both of which I think are unlikely, but preparing for the worst) I would still make a much less impressive $4K, but at least I wouldn't lose (and would likely learn some vauable lessons).

($472K [sales price] - $31K [commission/closing costs] - $5K [holding costs] - $432K [total investment] = $4K)

I'm fairly confident with my numbers, I went over the bid with the contractor line by line to ensure it was complete, and checked the recent comps and comfirmed with my realtor.

Just wondering how experienced flippers analyze their risk reward ratio and if you would consider this an acceptable risk.

Greg Dickerson · Answer

@Dirk Gesink Typically a 30-35% margin is what you want to shoot for.  Another way to look at it is you want to buy for 65-70% of ARV - Renovation costs

So on your deal $525k x 70% = $367,500 - $160,000 = $207,500 purchase price.

Some investors will go up to 80% ARV in a hot market. You're at 76% so if the comps are selling in less than 30 days you should be good but I like a little more margin in my deals.

Dirk Gesink · Answer

Thanks for your input gentlemen.

Anthony Dadlani · Answer

25% -35% Should be a target margin.  Of course doesn’t always happen. Sometimes its even better :)

Kuba F. · Answer

How big is the house?  The two major risks that you have (and have mentioned) are a softening market that will hit the upper end homes first, and that you should expect that the rehab will go over budget.  In general, you should aim for at least 15% profit.  You'll have other holding costs beyond your money costs: taxes, insurance, utilities. I don't know what your transfer costs are in AZ but they seem low to me.  At that level you'll also want to stage the property, so add another 3-5K for that.  All of these things add up and squeeze your profit.  All that being said, for these days, it's not a bad start.  If you were using hard money, it might not have been doable, though.

Experienced flippers, what is your acceptable profit margin?

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