Flip Analysis - Rules of thumb numbers
In Phase 1 of Deal analysis (See post on different phase of analysis), I use some rules of thumb numbers that I have come up with a over period of time to decide whether I want to spend additional time doing due diligence or under writing a deal.
Terms:
Acquisition Price (AP) - Price at which you can purchase the property.
Rehab Estimate - Provided by wholesaler + 20% buffer
LTV - Assume 20%, on hard money loan at 2 to 3 points, 12% interest
ARV - After Repair Value, that you expect to sell the property for based on competitive market analysis (CMA)
Duration - Duration of project from closing(buy) to closing(sell) in months
Rule of thumb numbers:
Cash out of pocket (COP) - 26% of ARV or 33% of (AP+RE) - includes hard cost and soft costs such as holding costs, rehab buffer etc. This is the cash needed to keep the deal operational as you draw down your hard money loan. This number varies from 22% to 30% of ARV, but 26% is the rot number to use for Phase 1 calculation.
Transactional costs - 18% of ARV - this includes buy/sell escrow and title costs, staging, permits, utilities, interest payments, brokers fee, excise tax and other holding costs. 18% number assumes a 6 month deal. Add 1% additonal for every month additional you think the project will take. This number can vary from 15% to 20% depending on the deal.
Profit = ARV - (AP + RE+ TC)
ROI = Profit/(COP)
Annualized ROI = ROI * 12/Duration
Lets take an example:
I get called by a wholesaler that he has a deal. The acquistion price will be $1M with a $200k rehab budget. The wholesaler expects an ARV of $1.5M. He thinks the rehab can be completed in 4 weeks. Lets say this is a wholesaler I have worked with in the past and I have confidence in his numbers. I would still throw a 20% buffer on the rehab budget bringing the project cost to a total of $1.24M. Its a striaght forward cosmetic flip that doesnt need structural changes so I would add a 2 week buffer to the timeline and add 6 more weeks for time on market and escrow, bringing the project duration to 6 months. Now my first phase analysis would go as follows:
1. Cash out of pocket = 26% of $1.5M or 33% of $1.24M = max($390k, $409k) = $390k
2. Transactional costs = 18% of $1.5M = $270k
3. Profit = $1.5M - ($1.24M +270k) = - $10k (Oops.. Its a loss)
4. ROI = Doesn’t matter
5. Annualized ROI = Doesn’t matter
Sorry.. lets move on the next one. (See it actually only took 2 minutes)
Now on the same deal lets say the rehab budget was $150k. Then with the 20% buffer your project cost is $1.18M. Now the numbers shake up as below.
1. Cash out of pocket = 26% of $1.5M or 33% of $1.18M = max($390k, $389k) = $390k
2. Transactional costs = 18% of $1.5M = $270k
3. Profit = $1.5M - ($1.18M +270k) = $50k
4. ROI = $50k/$390k = 12.82%
5. Annualized ROI = 25.6%
GREAT!! Off to Phase 2!
