Investors invest in businesses for one reason only: to make money. This is particularly true for real estate investing, which, despite the initial fees, is still one of the safest business endeavors out there.
Calculating return on investment (ROI) is crucial when making money by flipping houses in the real estate market. And it will help if you make a few essential considerations to obtain the most value for your money. Read along as we discuss how to calculate ROI for a fix-and-flip real estate investment.
How do Fix and Flip Work?
The fix-and-flip technique involves purchasing, remodeling, and reselling a property for a profit.
Because of the state of the property, investors generally purchase it at a discount. However, it could have fallen into disrepair due to abandonment, or the present owner couldn’t afford to keep it up. These properties are often found through foreclosures, short sales, or property auctions.
Suppose you intend to be successful at real estate flipping. In that case, you must be able to spend your money carefully and invest in undervalued homes. These are typically labor-intensive properties. Occasionally, the property merely needs cosmetic updates, but extensive renovations are often required.
Regardless, you’ll need to engage in renovations that will increase the property’s resale value and draw the attention of potential clients.
When the improvements are finished, you must list and advertise the home. You can consult Bay Property Management Group Northern Virginia to help with these home improvement activities.
How do I calculate ROI?
Before starting any calculations, every investor can perform some simple math to determine whether a property is worth further investigating.
Determine your desired sale price
When thinking about investing in a rehab project, it’s advisable to start by identifying the price you hope to resell it for. Then, you can look at comparisons and guarantee that the location and market can readily demand that price if you start with the end objective in mind.
Determine the Rehab Costs
This is the most challenging stage to calculate. Still, an anticipated renovation cost will help you assess if there is enough wiggle room in your math to make studying the property worthwhile. If you can’t go to the site or wish to use more precise figures, a fair rule of thumb is $50 per square foot in repair expenditures.
Determine the Purchase Price
The purchase price may be uncertain if the property is in foreclosure or will be auctioned soon. Therefore, you should know precisely what purchase price you are satisfied with. Anything less than that is preferable.
If a house is for sale, you should also see the purchasing price you want in terms of what you’d negotiate for and what you’d reject. 70% of your predicted sales price, minus repairs, is a decent rule of thumb for an expected purchase price.
3 Ways to Finance a Fix and Flip
Hard Money Loan
Hard money loans are typically beneficial to investors with bad credit and experienced investors who know they can flip a property quickly. However, they also work for inexperienced investors who need extra money to finish a transaction and those working with a contractor to flip a home.
Hard-money lenders are more concerned with the property and less concerned with the investor’s background. This is a viable lending choice if you find a fantastic offer but need better credit or a track record as an investor.
One of the most significant benefits of a hard-money loan is its quick turnaround time of hours rather than days for approval. This allows you to capitalize on opportunities as they emerge.
A hard-money loan can cover not only the acquisition price of the property but also the finances needed to complete the renovation, up to 85 percent of the overall project cost.
The duration of the loan can range from six months to two years, and there is no limit to the number of loans you can secure, so you can work on flipping many properties at the same time. Hard money loans are also frequently viable when traditional bank loans are unavailable.
Home equity line of credit
A home equity line of credit is available to investors with 20–30% equity in their homes. However, even if you meet these criteria, it may be a less tempting alternative because it implies putting your property at risk to support a fix-and-flip venture. This alternative also takes significantly longer than hard-money loans if you still need to get an open home equity line of credit.
Crowdfunding sometimes called “peer-to-peer lending” involves generating money through several people’s large or small investments. On a case-by-case basis, this may include investments from family or friends and internet companies that assist borrowers in obtaining the necessary cash for their projects.
Crowdfunding investors often recoup their investments through interest payments or by sharing project revenues. Some view crowdfunding as risky because it is still a relatively new source.
Flipping can be lucrative, but it usually necessitates investors acting swiftly to close on properties when they locate a great deal. Assessing your return on investment (ROI) determines how much revenue you have made on a real estate investment. It can also be used to compare the return on real estate to the return on other potential investments.