Some of the properties you and your Investor clients discover will be great for flips, but not for
rentals.
At this point, however, you want your clients to buy properties that are already in
service, up and running, rented, and showing an income. Investors buying empty, boarded-up
rental properties that need a lot of work will have a hard time getting financing. Banks right now
want to see properties showing a cash flow on day one. The bottom line is, he who masters the discipline of proper property analysis will become the master of profit.
The most important term to learn when it comes to flipping properties is the ARV – after repair
value. If you have an Investor in a neighborhood where the average home price is $200,000, then the
MOST your investor should have tied up in that property is 70%, or $140,000.
He can purchase it for $139,000, put $1,000 into the property and then sell it for $200,000. He’d
have enough room to pay the overhead for selling (commissions and closing costs) and make a
nice profit.
That 30% cushion is where the profit and overhead come from.
Yes, you can flip with a lesser profit margin. Yes you can flip with a greater profit margin.
However, you should not get in the habit of going below that 30% mark. Stay above it… well
above it: 30%, 40%, 50%.
In my history, I’ve had flips sold where the cost basis was only 30-40% of the total. That’s pretty
awesome. It doesn’t happen a lot, but it does happen.
NOTE:When you add the cost of purchasing a property to the cost of rehabbing it, the total MUST NOT EXCEED 70% of the After Repair Value (ARV).
You need to write this down and memorize it.
ARV is the market value of a property relative to its neighborhood.
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