How Much Profit Should You Make on a House Flip?

Having realistic expectations is one practice that can make you thrive in real estate investing. Many new real estate investors come into the industry thinking they will be millionaires overnight. Realistically any investment takes time to get huge profits. House flipping is no exception.

House flipping is simply buying a house below market value, rehabilitating it, and selling it at a higher price to get profits. Gross margins and the costs involved to get those margins will determine how profitable a house flip is.

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The amount of profit you make flipping a house varies largely. One can make $20,000 while another investor can make up to $100,000 per house flip.

However, on average with all other factors remaining constant, an investor can get a profit of $30,000 per house flipped. This can amount to 10% to 20% of after repair value. And the return on your cash invested can range from 10% to 100% depending how you finance the flip.

Calculating Profit

The simple profit formula is just resale price minus all the costs you had to spend on the property. What’s left is your profit (or loss).

Profit = Project resale value – all project expenses.

House Flip Profit Example

An investor purchases a house for $90,000 with a resale value of $200,000. The house needs repairs worth $60,000, has 2% in buying costs,$600 carrying costs per month, and 6% selling costs. The investor is using cash to purchase this property.

Assuming the investor holds the property for 5 months before selling the profit will be:

Profit= after repair value-acquisition cost-repair costs-buying costs-carrying cost-selling costs
Profit= $200,000 – $90,000 – $60,000 – (2%*$90,000) – ($600*5 months) – (6%*$200,000)
Profit=$33,200

The profit is approximately 17% of the after repair value. But your return is 21% since you earned $33,200 in profits divided by the $155,000 you invested of your own capital.

This is possible when you don’t incur finance costs. But assuming the investor got a loan for 70% of the after repair value with an interest rate of 10% for 6 months, the profits will be:

Profits= $33,200 – ((10%*$140,000)/12)*6
Profit= $26,200
Financing costs = $7,000 for 6 months

Since you invested 30% of resale value in your own capital into the flip, your return would be $26,200 / $60,000 which comes out to a 44% return on your cash invested.

Your profit went down from $33,200 to $26,200 but your overall return on your cash went up from 21% to 44%.

Using bank financing will help you get a higher return on your cash you invest, but cuts into total profits since you spend extra on mortgage interest. But it can help you acquire a house flip if you don’t have enough capital to fund the deal all cash and would miss out on the opportunity otherwise.

Average Earnings Per House Flip

An average investor can complete between 1-7 house flips per year. Assuming you make a profit of $30,000 per house flipped on the lower side you will make $30,000 and $210,000 on the upper end.

If you overspend on renovations by $20,000, you will still have on the higher side $190,000 pure profits by the end year. Veteran investors can handle up to twenty house flips in a year. This definitely increases their profit margins.

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Factors that Affect House-Flipping Profits

There are a number of factors that determine the profits you will generate. These variables if not handled wisely will highly have a negative impact on your returns. They include:

#1: Location

The place you are flipping in determines how marketable your property will be. You should be very keen on the neighborhood you invest in. It is advisable to check the crime rate and income levels.

Be cautious of areas where homes are selling very fast, either the local economy or the conditions in the area are driving people away.

To increase your profits lookout for a locality with a thriving economy. It can be characterized by high rates of employment and low rates of crime. This will increase the probability of getting a profitable house flip.

#2: Acquisition price

This is the purchase price. To get the right acquisition price you must first know the average market value of the property. A real estate agent can help you determine a property’s market value.

For a house that will not need a lot of renovations, you can buy it for 75% to 80% of the market value. With this purchase price, you will be able to do rehabilitation and get a profit after selling it.

If a house is in a bad condition and calls for substantial repairs you should buy it for less than 75% of its market value to get enough room to revamp it and still get a profit.

Purchasing using cash is one of the best options if you have the financial capability. It is simple and will save you the cost of getting a mortgage. Moreover, with a cash payment, you are able to attract sellers who can give you a good deal leading to better profits.

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#3: Renovations costs

Estimating your renovations will help you figure out your profits early enough. Invest in inspection to ensure you get homes that don’t require extensive repairs like major plumbing. In case you acquire such a home; get a professional contractor to do the job.

Don’t use cheap labor or do it yourself thinking you will save on costs. A professional will deliver quality work and save on time. Contractors in your area will be the best to go for. The more you work with them the more you understand their pricing. With time they may offer you a discount. Reduced rehabilitation costs will increase your profit margin.

#4: Carrying costs

These are the costs of maintaining a renovated home waiting to be sold. They include utilities, taxes, and insurance. As an investor, you should ensure you sell the revamped house very fast. The more you hold it the more costs you are likely to incur. You need a quick market to achieve this.

For a slow market, you require the help of a real estate agent to market your property. As much as it will cost you more you will save on the carrying costs.

Conclusion on House Flipping Profits

House flipping can be uncertain but very rewarding. Good judgment and time management are important for increased profitability in house flipping.

To get better results, minimize all the costs that dig into your profits and you will enjoy the benefits of the house flipping business

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