Before you venture into any investment, it’s wise to do your due diligence. If you’re thinking of purchasing an investment property, it’s important to not only calculate your potential ROI before you invest, but also be aware of the traps into which many investors fall.
Here’s The Ultimate Guide To Calculating ROI On A Fix And Flip Rehab Investment Property
Before any finer calculations begin, there is some quick math every investor can perform to decide if a property is even worth looking at further.
Step 1: Know your targeted sale price.
As you consider investing in a rehab property, it’s best to start by determining the price at which you hope to resell it. By starting with the end goal in mind, you’ll be able to look at comps and ensure the area and market can easily demand that price.
Step 2: Calculate the rehab costs.
This step requires the most work in calculating, however an estimated rehab cost will help you determine if there’s enough wiggle room in your math to even make investigating the property worth your time. If you’re unable to access the property or want to use quicker numbers, a good rule of thumb is $50/sq foot in repair costs.
Step 3: Determine the buying price.
If the property is in foreclosure or has an upcoming auction, the buying price may be an unknown. However, you should know for certain what purchase price makes you comfortable. Anything below that price is even better. And if a property is listed for sale, you should similarly know the purchase price you want as it relates to what you’d negotiate for and what you’d walk away from. A good rule of thumb for an expected purchase price is 70% of your projected sales price, less repairs.
Before You Borrow, Make Sure The Deal Makes Sense
Doing some simple math that assumes you use all cash for this investment will swiftly show whether or not it’s worth proceeding further.
Target Sales Price
– (Rehab Costs + Purchase Price + Closing Costs + Holding Costs)
Profit
This calculation is based on an unlevered investment model and therefore has no financing costs involved. Now, if the profit is significant enough, you’ll want to take a closer look at the property and determine the actual profit and return while levering a hard money loan.
Calculating ROI On A Fix & Flip Via A Hard Money Loan
Let’s say you found an investment property you wanted to fix & flip and negotiated a purchase price of $80,000. You planned to spend $20,000 in rehab expenses and created a rehab timeline of 90 days. Let’s compare the calculations of borrowing versus doing a cash deal.
| Hard Money Loan | Cash Deal | |
|---|---|---|
| Purchase Price | 80,000 | 80,000 |
| Rehab Cost | 20,000 | 20,000 |
| Holding Costs | 4,000 | 4,000 |
| Finance Costs | 8,000 | – |
| Total Project Cost | 112,000 | 104,000 |
| Loan Amount | 90,000 | – |
| Cash Needed | 22,000 | 104,000 |
| Sales Price | 140,000 | 140,000 |
| Closing Costs | 11,200 | 11,200 |
| Net Proceeds | 128,800 | 128,800 |
| Profit | 16,800 | 24,800 |
| Cash-on-cash Return | 76% | 24% |
The above scenario illustrates the power of leverage. Funding the deal with cash, the borrower generates a net profit of $24,800 while using $104,000 of cash. This gives them an ROI of 24 percent.
Using leverage via a hard money loan, the borrower is able to generate a net profit of $16,800 on a $22,000 investment, which equates to a higher ROI of 76 percent.
When To Borrow & When To Pay Cash
Some investors utilize cash only on their investment properties and have shied away from borrowing. However, as illustrated above, investors can generate higher cash-on-cash returns by partnering with a hard money lender in order to help leverage their cash.
For example, an investor with $120,000 in cash might be able to purchase one property at a time, rehab it over the course of 3 months and resell it. This process may be repeated 3-4 times during the year.
Partnering with the best hard money lender would allow that same investor to leverage his or her cash by investing $30,000 per property for up to 4 properties at once, while borrowing the rest.
Additionally a hard money lender offers many benefits in addition to financing. They add to your real estate investment team to help you:
- Evaluate each investment property’s ROI
- Provide due diligence on contractors and suppliers
- Guide you through the entire investment and rehab process from initial due diligence to completion of the deal through sale or refinance
Work With Ashmore Partners, The Best Hard Money Lender Serving PA, NJ, DE
All clients work directly with an Ashmore Partners co-founder to ensure stellar advice and consultation by experienced real estate investors. Our rates have no junk fees and no hidden fees. All clients receive access to our profit calculator to estimate your costs and gain visibility into a projected investment return.
