I am debating taking on a flip for the first time. Doing the numbers conservatively I am looking at a 8-10% return. Worth the effort?
@Steve Callaghan most investors evaluate a flip based on the cash volume proceeds. 8% sounds tight for a flip. On my own flips I am generally seeing minimum 50% return over the initial invest. If I invest $40k I would hope I can increase the value by $60k as an example
The bigger question is: What's your margin of error?
If your target profit is $10,000, you're doing $50,000 of renovation, and this is your first flip, all it would take is a 20% overage (or surprise cost) to turn this project into a loss.
Personally, I shoot for 15% return on sale price (i.e., if I'm reselling for $200,000, I look for a minimum $30,000 profit on the project). And this is for projects that generally take about 4 months from purchase to sale.
I like to look at what others in the same market are getting, to give a perspective of what the market bares.
What do other investors buy the property at? What are they selling them for? What are they paying for renovation costs? How are other investors financing the project? What is the typical profit other investors are getting as either a dollar amount or a percentage?
When we look at what everyone else is doing, we see what the market offers us as real possibility. What I personally want to make from a flip may or may not be possible in the market, which is why we need to set realistic expectations for ourselves. Im in DC, a very healthy flipping market...and while people make a lot of money in real dollar values, the amount you make on an ROI basis, are probably low compared to other markets because of how large our capital outlays are. But if I wanted a higher ROI, Im out of luck here, because the market is what the market is.
With the limited information it's hard to adequately answer the question but please take into account that COVID has slowed down several things that could also slow down your project. There are several things that can eat that profit away quick but increased holding costs all by itself can put you under water. Have to consider all angles. With a first flip there needs to be room for multiple degrees of learning mistakes.
@Steve Callaghan , As J Scott mentions, the return percentage is not the only story. I actually fall in line with J Scott exactly: 15% with a $30k minimum profit. I am not as experienced as J Scott but have done about 20 renovations, from surface level lipstick to full guts and additions. Even on the lipstick flips, it is not hard for an unforeseen error, say a tree root in a sewer line, to eat most of my $30k profit.
Generally, I would steer clear of that thin of a margin. Just the headache of managing a job and contractors will often times make it feel not worth it, and thats if there are no hiccups.
It depends on your market and your systems. I know larger scale flippers who have systems and crews that work like clockwork and the contractors and subs are all on the payroll so they can operate with thinner margins because it is a well-oiled machine. If you are doing deal by deal, you have to be way more careful and hopeful on the return. I don't do a flip if I can't get 50k profit out of it in my market. Sometimes we make way more, sometimes we come in a bit less, but I have to go in knowing my low ARV will net me 50. We usually get more because we are reasonable on our ARV and then try to break the comps in the market.
I won't consider a flip unless I feel with pretty conservative estimates i can net 30k and in usual market that number would be 50k but with covid thining out the market i'm willing to make a little less. But as @jscott said if your gross margin is too small you are in danger of losing money.
We find it helpful to factor in the size of the renovation. The bigger the project, the more profit it should yield. One way to do this is base the profit on % of renovation costs. One investor I know targets a profit of 50% of the repair costs but with a $10,000 minimum. So if the repair costs are $60,000 he would want the profit to be at least $30,000. This lets you target a smaller profit for the quick, easy and cheap flips that are really very little work.
@Steve Callaghan We don’t recommend any project unless there is a min 30% projected Roi%.
Best of luck in all your endeavors.