My Simple Flip Formula (Remember To Fact...

alphabet Hey Moguls, today’s lesson is about figuring expenses for a flip deal.

Matt Andrews here, and I’m bringing you this info because people have been asking me lately:

How do you know if you have a good property to flip?
And how do you determine how to figure the profit on that flip?

There’s a formula I use that’s so simple, it’s almost silly.

Here’s the formula:

Sales Price – Expenses = Profits

Like I said – simple.

But my question is, if everyone understands this, why doesn’t everyone do this? It’s a short, simple formula that I’m able to remember, and I’m no math genius.

So why do so many investors get into trouble in this area?

Here’s the answer: You can get messed up at any point in this process, but it’s in the expenses category that most investors slip up. They think:

“I’m buying this property for $100k, it’s worth $120k, so I’m going to make $20k profit.”

That’s not how it works. There are plenty of other costs to consider. Let’s take a look at what those costs might be.

Costs to Consider

Construction

If you’re going to fix up the property, you’ll have construction costs.

These costs can vary – depending on the type of workers you’re using, what kind of work you’re doing, your level of experience and the time it takes for the work to be completed.

This is a big cost item, and it’s where many investors lose out.

Insurance

Many investors look at a flip deal and fail to include the expense of insurance.

This may be long-term insurance, it may be construction insurance or vacant-house insurance, but it’s definitely a hard cost that must be built in.

Mortgage – Lending Cost

If you need a hard money loan to buy this property, that needs to be factored in.

Hard money can be pretty expensive, so this amount has to be right.

Or, perhaps you took out a conventional loan. Either way, those payments must be built in to the costs.

Closing Costs

Closing costs come into play when you buy a property, and they come into play once again when you sell the property. I’m amazed at how many investors don’t build closing costs into their transaction equation.

This is a fairly easy one to estimate. You know for your area how much a title search costs, how much title insurance costs, how much drawing up formal documentation and other state fees are...

So generally, you should be able to come within a couple hundred dollars of the costs, both on the buy side and the sell side.

Utilities

If you’re going to be fixing up a property, you can’t do it without electricity and water. Utilities become a very real cost when you’re flipping a property.

The longer the rehab lasts, the higher the utility bills.

Commissions

Commissions might include Realtor commissions or it might be a flip fee to yourself (if that’s how you are structuring the deal).

The Bottom Line

All of these are costs that must be factored in. When you look at the flip formula, make sure you’re justifying all the possible expenses.

Sales Price - Expenses = Profits

gaga You’ll be much better off if you err on the side of caution by building in a little extra cost...

If you overestimate expenses, that’s fine. It means more money in your pocket. But, on the other hand, if you calculate your expenses too liberally, you may lose money on the deal.

Losing money with unjustified expenses can really kill a deal. That can take you from a $30k profit down to $2k profit very quickly.

How do I know?

Because in the past, I was guilty of not having this formula correct.

This is what I teach my students – how to account for all of these different costs that are going to be in a flip. How to put that information into a spreadsheet, how to look at it objectively and how to make decisions based on real numbers, not on emotions.

Commit this formula to memory and use it. You’ll never regret it.