If math wasn't necessarily your strongest subject in school, you may find yourself avoiding situations where your calculating skills will be put to the test. In fix-and-flip investing, you will use basic math functions on a daily basis, and your ability to succeed will depend on knowing how to perform some critical calculations. None of the math you'll need is rocket science, but in case your basic skills need a little dusting off, here are some examples of situations in fix-and-flip investing where the math can make or break your ROI:
Let's begin with something super simple--a calculation you'll do dozens of times as a successful fix-and-flip entrepreneur.
Calculating square footage and price per square foot
Need to do a quick estimate on how much it's going to cost to replace the flooring in a fix-and-flip project? Just multiply each room's width by it's depth and multiply that by the cost per square foot of the flooring you plan to use.
For example:
A room that measures 20 feet by 20 feet will need 400 square feet of flooring. (20 X 20 = 400)
Since you should always purchase at least 10% more flooring than you'll need (just in case there's damage or your calculations were a little off), just multiply 400 by 10%
400 x 10% = 40
400+40= 440, so you'll need 440 square feet of flooring.
Let's say the flooring you want to use costs $4 per square foot, and your flooring installer charges $2 per square foot to install it.
440 square feet X $6 per square feet for materials and installation = $2,640 (add the cost of baseboards and finish work if being replaced).
Okay, okay. Maybe you were already smarter than a 5th grader and you do know how to calculate square footage,
but what about estimating ROI when you are trying to determine whether to pay what a buyer is asking for a distressed property?
What's the Most I Can Pay for the Property I'm Considering?
Let's say you've found a distressed property, and the owner is asking $100k for it. You've just compared the property you're considering to local comps, and in square footage, number of bedrooms, upgrades, amenities, etc., it looks like your property, after it is renovated, is similar to homes in the area that recently sold for $225k. This means, the ARV (after-repair value) of your subject property is about $225k.
Armed with the knowledge that the property is worth about $125k more than the seller's asking price, can you now give a maximum offer for the property?
Not quite.
What about other costs associated with the flip? Have you estimated your renovation costs yet? What will the holding costs be during renovation and what will it cost you to market the property and close the sale after you've found a buyer?
One strategy successful house flipping entrepreneurs use is setting a minimum project ROI and sticking to it. Before you make an offer to purchase a fix-and-flip property, know what your minimum acceptable ROI is, then do the math.
For example:
A fix-and-flip property is available for $100k and the after-repair value (ARV) is $225k. You might think $125k is a great margin and there should be plenty of profit built in to that deal. However, if the minimum profit percentage you will accept is a 25% return on investment (and the seller will not accept a lower purchase price), you should pass up a deal like this one:
Fix-and-Flip Property Sale Price$100,000Additional Acquisitions Costs$4,200Estimated Improvement Costs$60,000Holding Costs (4 month estimate)$4,300Hidden Costs (buffer)$5,000Selling Costs$16,000TOTAL COST$189,000AFTER-REPAIR VALUE$225,000POTENTIAL PROFIT$35,500PROJECT ROI18.7% (net return on $189,500 investment)
(Note: To calculate the ROI, you will divide the profit by the total investment cost: $35,000 / $189,000 = 18.7%)
Of course, if your business plan includes a minimum acceptable per-project ROI of 18%, this deal could work for you. In this same sample scenario, if you are able to get the purchase price down to $88,000, your net return jumps to $27.3%, which is why negotiating a lower purchase price is a great way to increase a fix-and-flip project's ROI.
Fix-and-Flip Property Sale Price$88,000Additional Acquisitions Costs$3,700Estimated Improvement Costs$60,000Holding Costs (4 month estimate)$4,000Hidden Costs (buffer)$5,000Selling Costs$16,000TOTAL COST$176,700AFTER-REPAIR VALUE$225,000POTENTIAL PROFIT$48,300PROJECT ROI27.3% (net return on $176,700 investment)
If you understand the basics of fix-and-flip math, and if you are skilled at estimating ARV, you will always be able to spot a great deal.
If you are seeking guidance as you prepare to go down the fix-and-flip road, we encourage you to contact the experts at Anchor Loans. We’re here to answer any and all of your questions, and we look forward to hearing from you soon.
