Experienced flippers, what is your acceptable profit margin?

[Dirk Gesink]

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]

@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.