Buying a house at below market value, fixing it up, and selling it is house flipping and it can be profitable.
Just how profitable depends on the situation. Some investors make as much as $100,000 or more and others make less than $20,000.
So what’s the average?
Typically, the average investor makes $30,000 net profit on a house flip if all factors align. Let’s look at what factors to consider.
What’s Your Gross Margin?
Your gross margin is basically the profit you make when it’s all said and done. It includes the price to buy the home, the rehabilitation costs and the cost to sell it.
As you can imagine, every investor’s profit margin will differ.
It doesn’t matter if you buy a house at ridiculously low prices, if it costs an arm and a leg to fix it up, it takes away from your profits.
But, if you buy a home for a high price and it still costs a lot to fix it, you may not have any profit.
What’s The Right Acquisition Price?
This is the million-dollar question. What’s the right acquisition price? There is no one-size-fits-all answer here.
Instead, we can look at the percentages. If you can buy a home for 75 – 80% of its market value, you’re in good shape. This means you must know the home’s market value. Talk to a real estate agent or local appraiser to find out the average value for the area.
If you can buy the home for ¾ of that price, you have room to fix it up and sell it. But again, it depends on the total cost of the repairs. If a home is in horrendous condition and requires extensive repairs, you may want to buy the home for a lot less than 75% of its fair market value.
How Much Are The Renovations?
It’s a good idea to develop relationships with contractors in the area. When you work exclusively with certain contractors, you’ll know their prices and they may even offer lower prices if you send them consistent business.
The lower the renovation costs, the higher your profit margins. While you can’t 100% predict the renovation costs before you buy a home, you should have a good idea, so it can help you determine if it’s a good investment or not.
What Are The Carrying Costs?
Know the market before you invest in a home. If it’s slow, you’ll have more carrying costs. Can you afford them?
Carrying costs are the costs you incur while you still own the home. Once you buy and renovate a home, it’s still your responsibility until you sell it. If the market is slow, you may sit on it for a few months.
This means you must continue paying the mortgage, insurance, taxes, and the home’s upkeep. Can you afford the carrying costs? They take away from your net profit as they figure into the cost of buying, fixing, and holding the home.
Make sure you leave a large enough cushion for the carrying costs based on the average time on the market in the area.
Can You Make More Than $30,000?
Every house flip is different. Can you make more than $30,000? You might. It depends on the circumstances.
If you price the house right, doing your homework to find the home that’s priced well below the market value but doesn’t require extensive work you’ll be in good shape to make more than $30,000. Of course, it depends on the market too. Are there buyers? Are they willing to pay what you want for the home? How long will you hold onto the property?
Each of these factors plays a role in your profit margins. While you can’t win them all and make more than $30,000 on every house flip, if you play your cards right, you may be able to maximize your profits more than you thought possible.