The Mathematics of a Flip
Flipping houses is a high-reward, high-risk business. Your "profit" isn't just the difference between what you bought it for and what you sold it for. You must account for the "Silent Killers" of profit:
- Holding Costs: Every day you own the property, you are losing money. Hard money loan interest (10-12%), property taxes, insurance, and utilities eat into your margin daily. Speed is your ally.
- Selling Costs: Don't forget that selling cost 8-10% of the final sales price. This includes agent commissions (typically 6%), closing costs (2%), and concessions to the buyer.
The 70% Rule
Target Calculation
Max Allowable Offer (MAO) = (ARV x .70) - Renovation Costs
This rule builds in a 30% buffer for your profit, holding costs, and safety margin. If you stick to this rule, it is very hard to lose money.