If you’re a home flipper, you’ve probably seen those flipping reports. You know, the ones that break down average fix-and-flip returns, as well as stuff like original acquisition prices, final flipped prices, and flipping activity overall?
Heck, I covered one myself here at Millionacres a few months ago.
If you’ve read it (or have ever read a similar report), you might have come away a little worried.
Are your profits a far cry from those in the report? Are you wondering what you did wrong or what these magical, high-return flippers are doing that you aren’t?
Well, don’t. Those numbers might not carry as much weight as you think.
Don’t get me wrong; those flipping reports are accurate -- at least technically. But should they be your barometer for home-flipping success? Definitely not.
The thing is, these return-on-investment (ROI) stats don’t include the most important number in the fix-and-flip equation: your rehab costs.
The costs to fix and flip a property can vary wildly. They depend on the home’s condition, the repairs and upgrades you make, local buyer preferences, and even the unique labor and material costs in your area. For these reasons, reports on flipping returns leave these numbers out entirely.
Instead, most reports focus on more easily accessible information, like the sales price upon acquisition and the sales price once flipped. While these numbers matter in the overall scheme of things, they’re not really an accurate depiction of what a flipper earns on any given property.
If rehab (which can sometimes cost a pretty penny) was factored in, the ROIs on these reports would be lower -- much, much lower, in most cases.
What’s a home flipper to do?
The moral of the story is simple: If your average returns are lower than what you see in widely reported statistics, that’s okay. In fact, it’s downright expected.
While these reports can help gauge how much a flipped property might sell for in any given area, they’re not very accurate in showing true fix-and-flip ROIs.
To determine that -- more importantly, to ensure you have room for a solid ROI when purchasing a property -- you have to know your market. Use comps to determine a home’s likely after-repair value and take care to estimate your rehab costs accurately. These should factor heavily into your offer (experts generally recommend paying no more than 70% of your after-repair value, minus repair costs.)
Finally, don’t forget to allot a little extra for incidentals and unforeseen repairs. Plenty of challenges can arise when flipping a house; working those into your projected rehab costs from the start can ensure a healthy ROI down the line.