How Much to Pay for a Detroit “Flip” Opportunity
Article by, Brent Virkus Founder of Motor City Design Build and Member of Team Virkus
The key to making money on a residential “Flip” is to make your money on the buy side… One of the questions most investors struggle with is determining how much they should pay for a real estate investment or “Flip” opportunity. Well if you are one of those people, we thought we would share how Team Virkus does it:
- First…Determine how much your Flip opportunity will sell for once fully renovated. You do this by reviewing comparable sales of properties in the specific neighborhood you are looking to invest in. In this example, let’s say your research shows you will be able to sell your property for $300,000 once renovated.
- Second…Determine what your net proceeds will be when you sell the property. This is done by reducing the anticipated sale price by the amount you will have in closing costs when you sell the property, as well as, any carry costs you will have during your renovation period (i.d. utilities, property taxes, etc.). Team Virkus finds this runs roughly 10% of your ultimate sales price. So in our example you plan on selling the property for $300,000. Under this scenario you would multiply the $300,000 by 90%, which gives you your net proceeds when you sell the property. In this example your net proceeds would be $270,000.
- Third…Adjust your net anticipated net sales proceeds by the profit margin you are trying to achieve. For example, if you are trying to achieve a net return on investment of 15% you would divide $270,000 by 1.15 to determine how much you can have into the deal (i.e. Your overall cost to buy and renovate the property). In this example you can have an “all in cost” of $234,782 to achieve a 15% return on investment if you are able to sell the property for $300,000.
- Fourth…Determine how much you can pay for the property by reducing your all in cost by the cost to renovate the property. In this example we will use a cost to renovate of $100,000. So to determine how much you can pay for the property simply subtract $100,000 from your anticipated all in cost of $234,782. This means you can pay $134,782 for the property and achieve a 15% return on investment if you are able to sell the property at your target sale price of $300,000!
If you follow these four simple steps to determine how much you can pay for the opportunity you will quickly be able to determine whether you have a good one on your hands…