To flip or not to flip. That is the question. Not all purchases are created equal. That is, Property A may not be suited for the same strategy as Property B.
Two of the main exit strategies I employ in my business are Flip & Hold. To help determine which is best suited for a particular property, I calculate the Return on Investment.
Return on investment (ROI) is an accounting term that indicates the percentage of invested money returned to an investor after the deduction of associated costs.
For the non-accountant, this may sound confusing, but the formula may be simply stated as follows:
ROI = (Gain from Investment – Cost of Investment) / Cost of Investment
ROI is usually expressed as a percentage, and indicates cash flow from an investment to the investor over a specified period of time, usually a year. If someone says that they made a 20% return, they usually mean that the investment made them a 20% gain that year.
In general, the higher the investment risk, the greater the potential investment return, and the greater the potential investment loss.
So, what is a good return on investment for a property that you will buy, fix, and flip? You will get many different answers depending on whom you ask, but here is my general rule of thumb:
After renovations, I want to be into a property for 65-70% of its current value. For example, if a property is worth $100k, then I do not want to have any more than $70k invested in that property.
Assuming I pay realtor fees, buyer concessions, and closing costs totaling $10k, my profit will be $20k and roughly a 30% return on investment. I arrived at that percentage by dividing 20 (my profit) by 70 (my invested capital).
There are other factors to consider when deciding which exit strategy to go with, but calculating ROI is the first and easiest tool I use.