As we invest to make money, new real estate investors often ask me, how much will I profit from selling my home? Actually, the profit of selling homes depends on different factors. In this article I’ll discuss how a few major factors affect the return you’ll receive on a given deal.
Specifically, I’ll cover each of the following topics:
As stated above, several major factors will dictate how much you profit from a given home sale. And, while I’ll discuss additional, strategy-specific factors below, I want to first outline these three major ones:
Now that I’ve discussed the broad factors influencing profits on property sales, in general, I want to talk about how specific strategies affect profits. First, I’ll cover wholesaling.
In a wholesaling deal, the investor typically doesn’t even actually purchase a property. Instead, he or she finds a deal, puts it under contract, and then assigns this contract to a third-party (likely a house flipper) for a fee or percentage of the purchase price. And, in doing so, wholesalers inherently assign the contract for the property “as-is,” that is, without any improvements.
While deal- and market-specific factors will influence exact numbers, in my experience, I’ve seen the typical wholesale deal result in a profit around $2,000 to $5,000 (though sometimes as high as $20,000). Put simply, as the wholesaler doesn’t actually purchase the property, these deals have significantly less risk than fix-and-flips. But, the other side of that coin means that they also have far less reward.
For wholesalers, low risk, no maintenance requirements, and no holding costs represent the primary advantages to a deal. But, lower returns constitute the associated disadvantage of this strategy.
Considering the above, the profit target for a wholesale deal should be simply a return on the investor’s A) time finding the deal, and B) marketing costs associated with finding a third-party assignee for the contract.
Next, I’ll talk about a higher-risk and higher-reward investing strategy for investors seeking larger profit margins – fix-and-flip deals. With a fix-and-flip strategy, investors broadly pursue the following three steps:
As investors assume significantly more risk in this sort of deal, they also command far higher returns than a wholesaler would. Once again, exact numbers vary by deal and market, but I’ve seen average profits across hundreds of flips at around $35,000 per deal.
These higher profits represent a clear advantage to a fix-and-flip strategy. But, this higher profit goes hand-in-hand with much greater risk. Specifically, investors face rehab-, resale-, and loan-related risks by purchasing a home to rehab and resell at a greater price. However, this final risk pertaining to debt can be eliminated if investors have the cash to self-finance a deal (though this also exposes investors to the risk inherent to tying up so much cash in a single deal).
As a general rule of thumb, I argue that house flippers should strive for a profit target of 10% net profit margin after sale, that is, a 10% return on cash invested considering all expenses. If investors analyze a prospective deal and come up with a lower projected return, they should absolutely reject it and consider another deal. As stated, too much risk exists in house flipping to not receive a high return on a deal.
Regardless of what strategy real estate investors ultimately choose, they need to consider three final factors in their pursuit of profit:
NOTE: Real estate investors can defer capital gains taxes on property sales with a Section 1031 like-kind exchange, but specific requirements exist. Investors should speak with a tax professional to determine if this approach makes sense for their unique situation.
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