How much profit is enough? - Posted by G in BC

Posted by JohnBoy on July 04, 2002 at 13:57:30:

NO! This is not a good deal! If you were getting this for about $250k that “might” be a good deal!

For a property in this price range you would want to make at least a 20% PROFIT to justify your risks for investing that much money!

You need to figure in reselling costs, holding costs, repair costs, closing costs, loan fees and your PROFIT and then deduct all that from what the property will be worth after all the repairs are done.

So if after the repairs are done the property will be worth $349k, take 20% of that for your PROFIT which is about $70k.

Take off 6% to cover realtor’s commission to resell it once you finish the repairs which on a $349k sales price would be about $21k.

Take off the $10k repair costs needed.

Take off 6 months of holding costs which would be any payments on your loan, utilities, insurance, etc. So that would be about $18k at least with $330k invested.

You will need $10k for repairs which puts you at needing $330k, so figure 4% for closing cosing costs and loan fees which will be about $13k.

So that comes to $70k + $21k + $10k + $18k + $13k = $132k total COSTS to you after figuring in your PROFIT.

$349k - $132k = $217,000.00. This is what you want to pay to get a GOOD DEAL! So paying $250k that I mentioned above off the top of my head will be pushing it! That will leave you with a potential $37k profit left once all the smoke clears by the time you resell it and close on the sale! If you’re lucky!

Now do you THINK a potential $37k profit on a house in this price range is to much to expect to justify all your risks involved with having to pay out $250k to buy it and tie up that much money using YOUR credit and any cash from your pocket??? Think again! That only leaves you with a “potential” profit of $37k which is only 10.6% of the $349k selling price that you can get for it after you finish the repairs!

Look at what the realtor gets. The realtor alone gets 6% just to list it on the MLS and TRY to sell it. The realtor doesn’t have any risks. They have NO payments to make. NO loans to take out. NO credit they need to use and risk. They either sell it or they don’t. If they don’t sell it they lose nothing but a little of their time and minimal costs to list the property. And if they sell it they get paid a $21,000 commission for their troubles!

Now I’m not saying that is to much for a realtor to make. But comparing to what they stand to make by having no risks involved compared to what the risks an investor will have involved by tying up that much money and using their credit on that amount of money…that $37k potential profit doesn’t look all that attractive any more when you compare the risks involved, does it???

Heck, you can make that much buying a $100k property in need of total rehab by buying those for a lot less where you can make an easy $30k - $40k profit on the deal after all the smoke clears! So looking at a “potential” $37k profit IF all your numbers are right AND everything goes to plan AND you sell it within 6 months after buying it, investing $250k to “potentially” make that much looks a lot less attractive and a lot more risky to make that much!

You are in business to MAKE MONEY! Not buying someone elses problem by letting it become your problem where you end up LOSING money! You don’t even want to risk breaking even. You have to put a lot of time, work and money into the deal that carries a lot of risk on your part. So ALWAYS make your profit when you buy and make sure the profit is worth the amount of risk you have to take!

If you pay $320k you would lose your A$$ on this! You will be pulling money out of your poicket just to get it sold!

It needs $10k in repairs. That puts you at $330k right there! Add about another 4% easy for closing costs and loan fees to buy the thing! On $330k purchase price (adding in the $10k to cover repair costs) that alone will cost you about $13,000!

That puts you at $343k invested into the property. Then add in up to 6 months holding costs, 6% to resell it and you’re looking at needing about $40k out of pocket just to get rid of the thing!

On $330k in financing costs, plus taxes and insurance and utilities over 6 months you will be out about $18k in 6 months!

Add that to the $343k you already have tied up in the property and now you’re up to $361k invested into this. Then add in the $21k to pay the realtor commission just to resell it for the $349k! That puts you at a total of $383k invested on a property that is worth only $349k!!! And that’s assuming the repairs only cost you the $10k without having to pay more than that AND assuming you get the place resold and close on the sale within 6 months from the date you purchase it!

Right there you are looking at taking $40k out of your pocket just get the property sold again and after paying off the $343k you financed!

So does that $320k price still look like a good deal to you now???

Offer $220k and leave room to counter offer up to $250k MAX! Assuming your numbers are right that will allow you room to “potentially” make up to $37k PROFIT once all the smoke clears! And that is pushing it!

How much profit is enough? - Posted by G in BC

Posted by G in BC on July 04, 2002 at 12:52:29:

I have a house in my neighbourhood that is listed for $349,000 with an assumable (with qualifing) $160,000 mortgage @ 5.5% with 4.5 years left in the term. It needs about $10,000 (all cosmetic) in work to fix it up. It has 2 suites and rents for $1700. Seller is an investor selling a few properties because of “other interests”. Realtor says he’ll carry some but not a large mortgage as he needs cash. The seller is currently fixing the house up and it was just listed on tuesday. Realtor says I may be able to get it for $320,000 and I have to finish the house. Is it worth it. The market is hot but slowing a little and it’s in a desirable area.

My question is when rehabbing or flipping how much profit is reasonable? And with credit that’s not great, how could I finance this? Can this be a good deal? It will be going on MLS soon.

Thanks in advance

G in BC

Re: How much profit is enough? - Posted by Ronald * Starr(in No CA)

Posted by Ronald * Starr(in No CA) on July 04, 2002 at 19:22:10:


You do not indicate WHY you would buy this house? If for long term rental, which is my favored invesment, this is a LOSER.

Now, your information is a little hazy to me. The $1,700 rent that you mention. Is that for the total of two units? If so, forget it. If that is for one unit, then this is just a so-so deal.

You don’t have good credit? You are not going to be buying this property.

Oh, reread your post. You are talking about “flipping.” Then I defer to JohnBoy’s analysis. I read it over and found nothing wrong with it.

Just because there is a property for sale does not mean it is a good deal. In fact, when a property is listed for sale, you can be over 98% sure that it is NOT a good deal.

You might want to read up on real estate investing, so you don’t waste time with properties which make no sense as investments.

Good Investing**************Ron Starr**********