Some house flippers will buy based on the style of the home, its location, or the type of projects that need to be completed. For me, flipping is a game of time and money.
I buy based on expected risk, projected timeline, and math. If resources are available and the deal makes financial sense, I’ll buy it. My main focus is the value I can create for returns and the data points I can obtain.
So when I’m evaluating whether a deal is right for me, I always consider these five things.
1. Meet my minimum return
My minimum requirement is a six-month cash return of 35% (or an annual return of 70%). Flipping comes with risk, so the rewards have to be worth it. Knowing my returns helps me make quick decisions and build my risk tolerance. By creating standardized return expectations, I can easily determine how aggressive I need to be.
2. Can be completed in a short time
The quicker I get in and out of a trade, the higher annualized return I can generate on the next trade. Maximum growth returns compound. The longer the project takes, the higher the profit required. Too much time can quickly erode profits.
3. Have reliable competition
I don’t like speculating when buying high return, high risk investments. I always make sure I have at least two comparable properties that have sold and at least one comparable property for sale in order to properly assess the post-rehabilitation value.
Additionally, I review market conditions by looking at home absorption rates and current inventory levels. When absorption and inventory levels are high, it indicates whether the property’s value has room to rise and how quickly it can remain on the market. These data points helped me determine my hold time and how quickly I thought I could flip the house.
4. Have resources available
If I didn’t have the staff readily available to execute the scope of work on a particular project, I would likely walk away from the deal. If you don’t have the resources available to implement the plan, it will slow down the project, resulting in inefficiencies and lost profits.
5. Avoid potential deal breakers
No matter how cheap the deal, my saboteur will never give in. These include environmental concerns, long-term permits, disputes and site requirements that could result in an unknown timeline. An unknown timeline means an unknown return, and I want nothing to do with that.
Put my plan into practice
The Flip/Off competition with Henry Washington is based on annualized cash-on-cash returns.
Often, the length of construction time and time to market can greatly impact a project’s profitability. My goal was to have a more aesthetically pleasing flip to minimize delays and ensure I had the resources readily available to complete the scope of the work. Profitability depends heavily on timelines. The amount of time our capital is invested in trading (the less the better) will directly impact our cash returns.
When I chose the Kent Project, I stayed true to my core principles. I purchased this 1,340 square foot home for $380,000 and quickly identified a contractor who could begin work immediately.
What attracted me to this house was that this three bedroom, two bathroom home already had a great layout, a large backyard suitable for a family, and was on a great street. From experience, I know that projects with minimal layout changes automatically have faster timeframes because slow licensing issues are not required, as well as minimal frameworks.
I was also able to find the three closest houses of the same style within a half-mile radius with an estimated after-restoration value (ARV) of $625,000. After contacting agents in the area, I confirmed that each property had multiple offers and over 20 interested buyers. This valuable information told me that I could speed up the process again without having to plan for a longer time to market. I can also assume there is some runway on the ARV.
Choosing the right product, finding a contractor who could start the day of closing, and gathering information from agents in the area all confirmed that we should be able to flip the house in less than six months.
final thoughts
Flipping isn’t just about profit. It’s designed to deploy your capital in the most efficient way and generate the highest overall returns. Understanding your resources, confirming your data, and building your golden shopping cart will help reduce risk and allow you to grow most effectively.
Whose real estate flipping can bring the biggest returns?
House flipping competition like never before! Henry and James detail two recent flips they’ve been working on and pitted them against each other to see who could get the highest returns. Which property will win the Flip/Off?
Notes on BiggerPockets: These are the opinions written by the author and do not necessarily represent the views of BiggerPockets.
