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Real estate investors begin investing to make money. In other words, they want to find profitable deals. But, countless factors can affect your returns on a given deal. This begs the question, what is the average profit on flipping a house?
A variety of factors influence a flip’s profit. On average, we’ve seen investors make roughly $30,000 per deal. For new investors, you should learn how to calculate a potential deal’s profit before committing. And, related to this, you should focus on avoiding the ways investors lose money on deals.
I’ll use the rest of the article to cover different house flipping considerations for investors – and how to make it a profitable strategy.
Variables that Affect House Flipping Profitability
I need to emphasize this: a ton of variables affect house flipping profitability. As such, I can’t provide an average that can be applied to every single market and situation. But, by outlining some of the major factors that influence profitability, I can provide key insight into the house-flipping process. While not an all-inclusive list, the below items largely drive the profit (or loss) on any given deal:
- Location: You cannot estimate an average flip return without considering the broader real estate market. For example, the average home price in San Francisco is currently above $1.2 million. On the other hand, Omaha sees an average price closer to $220,000. Clearly, the profits on a San Francisco deal will need to be larger than those in Omaha. If not, how could any investor justify the larger risk associated with rehabbing property in such a high price – and tax – range?
- How you bought the property: In other words, did you purchase a listed property from the MLS or an off-market one? When you buy properties from the MLS, you need to compete with both primary homebuyers and other investors. This level of competition drives prices up, so you’ll likely end up paying retail (or higher) for any MLS home. With off-market properties, you can purchase directly from motivated sellers who haven’t listed yet. This situation creates far better opportunities, and investors tend to get outstanding deals with off-market properties. When you buy a home for less, you’ll inherently have a larger profit (all else being equal).
- Buyer’s vs seller’s market: The type of market will also affect a deal’s profit. Generally speaking, in a buyer’s market, an excess of housing supply means that buyers have the negotiating power. This tends to drive home prices down. Conversely, seller’s markets align with a shortage of housing supply, which provides sellers the advantage. This typically drives home prices up. As a result, the same home could see significantly different profits depending on whether it’s sold into a buyer’s or seller’s market.
- Ability to stick to a budget: This factor relates directly to the investor’s efforts. Profit largely depends on your ability to create and stick to a rehab budget. If you blow your budget due to inefficiency and waste, you’ll see a lower profit – or a loss.
Average Profits We’ve Seen House Flipping
Having outlined the above factors that influence a flip’s profits, our team has seen hundreds of deals. Either through financing or direct involvement, the Do Hard Money team has a ton of experience flipping houses. Accordingly, we can confidently provide the average profit we’ve seen on house flipping deals. But first, I want to explain some profit definitions new investors should understand. Namely, investors need to recognize the differences between gross and net profit.
I like to think of gross profit as HGTV profit. It’s what all those house flipping TV shows make profits seem like to viewers. Simply put, gross profit equals sales prices minus purchase price and rehab costs (e.g. labor and materials). For example, assume you purchased a home for $100,000, spent $50,000 on the renovations, and sold it for $200,000. You’d have a gross profit of $50,000 ($200,000 sales prices minus the total of the $100,000 purchase price and $50,000 in rehab costs).
Gross profit is a useful tool for analyzing a deal’s potential, but it doesn’t represent your actual take-home profit. For that, you need to calculate a flip’s net profit. Net profit deducts all the additional expenses to any flip outside of the actual rehab. These include holding costs (e.g. utilities, property taxes, insurance, loan interest) and the sales transaction costs (e.g. transfer taxes, agent commissions, title fees, capital gains taxes, etc.). Assume all of these additional costs totaled $30,000. Now, what seemed like a $50,000 profit in the above example becomes a $20,000 net profit. And, net profit represents what you actually put in your pocket after a deal.
After explaining this difference, I’ve seen an average of $30,000 in net profits on individual house flips. This includes all of the houses I’ve personally flipped and the ones flipped by our customers. Now, I also need to emphasize that this number represents an average. On some deals, I’ve seen net profits as high as $70,000. In others, I’ve seen no profit.
But, for planning considerations, $30,000 serves as a reliable average for home flippers. Specifically, this number can help you with long-term deal planning. For instance, say you need $100,000 in annual take-home pay to live comfortably. As such, you could reasonably project that you’d need to complete three to four deals per year to make a living as a house flipper.
Calculating a Deal’s Profitability
Successful real estate investors understand that you need to calculate a deal’s profitability before beginning it. While real-world results will certainly alter these initial estimates, this budgeted profitability will tell you whether a deal makes sense to pursue. And, on paper, calculating a flip’s profitability is pretty straightforward:
- Step 1 – Estimate after-rehab value (ARV): This is what you estimate you’ll sell your property for after completing all renovations. To figure this out, you can either hire an appraiser to complete an ARV appraisal or pull comps to estimate the number yourself.
- Step 2 – Determine purchase price: This is the price you’re willing to pay to initially purchase the home. With MLS-listed homes, you’ll have trouble finding deals below the asking price. With off-market properties, you have far more influence on this price, as you can offer anything. If a seller accepts, great. If not, move on to another potential deal.
- Step 3 – Calculate rehab budget: This entails working with a contractor to figure out how much the labor and materials will cost to rehab a property.
- Step 4 – Calculate the holding and transaction costs: These are all the other costs that go into calculating net profit. Accurately estimating these numbers poses a challenge for most new investors. It takes a lot of experience to develop a reasonable number here.
- Step 5 – Determine net profit: This final step simply uses basic math. Add up the numbers in Steps 2 – 4 and deduct them from the ARV determined in Step 1. The difference gives you your net profit.
Advanced Deal Analyzer Software
I stated it above, but calculating profit on a house flip may seem straightforward on paper. In reality, accurately estimating all of the above numbers can be extremely challenging for new (and experienced) investors. As a result, we’ve developed the Advanced Deal Analyzer, a house flipping profit calculator. This proprietary tool does all of the above calculations for you, quickly telling you whether a deal will be profitable or not.
With our calculator, investors just need to enter a property’s 1) purchase price, and 2) repair costs. The calculator interacts with our massive database of properties and historical transactions to do everything else. Specifically, after entering these two inputs, the Advanced Deal Analyzer will tell you:
- Whether or not a deal will be profitable
- How much profit you can make
- How much hard money you can qualify to borrow for a deal
These results save a tremendous amount of time by providing a quick assessment of profitability. And, the Analyzer also gives you a detailed breakdown of projected costs. This breakdown gives key insight into a deal’s costs. You can use this insight to maximize your profit by seeing where and how to best commit funds to a deal.
House Flip Profit Mistake 1: Overestimate ARV
I’ve used the above to talk about how to figure out average profits on house flips. Now, I want to discuss a few house flipping mistakes to avoid if you want to maximize your profit. In other words, rather than asking about average profits, investors should ask how people lose money on deals. Specifically, investors regularly make three mistakes that significantly undercut a deal’s profits. By understanding these mistakes, you can take steps to avoid making them yourself.
First, investors often overestimate a property’s ARV. When conducting their initial deal analysis, investors use extremely optimistic ARVs. For example, let’s say a property, once rehabbed, will have three recent comps: 1) $250,000, 2) $275,000, and 3) $300,000. Looking at these comps, you could certainly project a high-end ARV for your property of $300,000. But, what if your home sells for the low-end $250,000? You’ve just taken a $50,000 swing in your projected profit. For most deals, this would mean switching from a profit to a loss.
Bottom line, when projecting ARVs, investors need to think like accountants, not gamblers. Accountants apply a conservative, low-ball approach to estimates. Gamblers go with the best-case scenario. If you incorporated the $250,000, low-end comp into your deal analysis, you’d be in a much better position. If the numbers still work with the low-end comp, go with the deal. And, if you end up selling for the high-end comp, great, you’ll have a larger profit.
House Flip Profit Mistake 2: Underestimate Rehab Costs
The next common house flipping mistake investors make also involves an underestimate. More precisely, investors often underestimate a project’s rehab costs. For example, say you buy a place for $100,000 and have solid ARV comps projecting a resale value of $250,000. If you estimate rehab costs of $50,000, that leaves you with a gross profit of $100,000. Even factoring in the additional holding and transaction costs, that should still leave you with a sizable net profit.
But, what if your rehab costs actually cost $60,000? $75,000? $100,000? At what point does your deal cross over from profit to loss? Once again, successful investors need to approach rehab costs like accountants, not gamblers, and take a conservative approach. And, assuming you’re not a contractor, you’ll need to work with a contractor to develop these conservative estimates.
With experience, you may get to the point where you can accurately estimate a project’s total rehab costs. But, most investors need input from a contractor for accurate forecasts. As such, before developing a deal’s total budget, you need a contractor bid (or several) providing you an accurate estimate of a property’s total rehab costs. And, you may end up getting a range of costs from several bids.
In developing your total flip budget, I recommend taking the conservative approach and using the highest contractor bid. That way, if the rehab comes in lower, you’ll net a higher profit. But, worst-case scenario, it comes in on-budget and still leaves you with a profit.
House Flip Profit Mistake 3: Buy for Too Much
The final common profit mistake investors make comes on the front end of deals. A flipper will run the numbers on a property and pay too much for it, thinking that he or she can make up those costs during the rehab or sales process. Unfortunately, this assumption ignores the real world. When rehabbing a house, unanticipated problems will inevitably occur. A water heater will break. Or a roof will cost more to replace than originally anticipated. Or any other number of problems will pop up.
Smart investors account for these contingencies. They incorporate some “flex” into their budget. If you fail to include this budgetary buffer, your rehab will certainly come in over budget. That’s just life. So, don’t assume everything will go exactly as planned, letting you cut some back-end costs.
Having said that, investors cannot plan to make up for an overpayment over the course of a deal. If you pay too much for a property up front, just assume that those additional costs will cut directly into your profit. Instead, investors should ask: how can I avoid overpaying for properties?
I mentioned it briefly, but savvy investors don’t look for deals on the MLS. They develop marketing strategies to find off-market properties. Investors want to look for three characteristics to find a good deal:
- Not listed: If a property isn’t listed on the MLS, you’ll have far less competition in offering to buy it. Other investors likely won’t have approached the owner, and homebuyers looking to find a primary home definitely won’t have made an offer. This provides you greater bargaining power, and it means you’ll need to provide a smaller earnest money deposit.
- Equity: You need to make sure the owners of these properties have some equity in their homes. This equity translates into cash they’ll receive on a sale. If owners don’t have any equity in a property, why would they want to sell at all?
- Motivation: Equity alone won’t make someone sell a property. Plenty of homeowners own their properties free and clear but have no intention of ever moving. Recognizing this, you’ll want to look for owners who have some motivation to sell. In other words, you want to find people who, for one reason or another, need to turn their equity into cash. In these situations, investors act as problem solvers. Owners have a problem that requires cash to solve, and investors provide that cash via a home purchase. Everyone wins. The homeowners put cash in their pockets, and the investors find great deals.
Okay, but how do you find these sorts of deals? I highly recommend checking out our Investor’s Edge software. We’ve compiled a database of over 160 million properties that investors can search for off-market properties. And, our property information includes the current equity in those properties, meaning you can quickly and effectively narrow down potential deals.
Regardless of your unique situation, if you want to successfully flip houses, you need to run the numbers before a deal. This prevents you from picking and choosing deals based on emotion. Instead, developing a conservative budget – and avoiding the above major mistakes – will make sure you A) only pick the best deals, and B) maximize profit on the deals you do choose. In that vein, average profit matters far less than your accurately budgeted profit on a potential deal.