Real estate investors begin investing to find profitable deals and money (duh). But, countless factors can affect your returns on a given deal. This begs the question—what is the average profit on flipping a house?
A variety of factors influence a flip’s profit. On average, we’ve seen investors make roughly $30,000 per deal. For new investors, you should learn how to calculate a potential deal’s profit before committing. And related to this, you should focus on avoiding the ways investors lose money on deals.
I’ll use the rest of the article to cover different house flipping considerations for investors—and how to make it a profitable strategy.
I need to emphasize this: a ton of variables affect house flipping profitability. As such, I can’t provide an average that can be applied to every single market and situation. But, by outlining some of the major factors that influence profitability, I can provide key insight into the house-flipping process. While not an all-inclusive list, the below items largely drive the profit (or loss) on any given deal:
Having outlined the above factors that influence a flip’s profits, our team has seen hundreds of deals. Either through financing or direct involvement, the Investor's Edge team has a ton of experience flipping houses. Accordingly, we can confidently provide the average profit we’ve seen on house flipping deals. But first, I want to explain some profit definitions new investors should understand. Namely, investors need to recognize the differences between gross and net profit.
I like to think of gross profit as HGTV profit. It’s what all those house flipping TV shows make profits seem like to viewers. Simply put, gross profit equals sales prices minus purchase price and rehab costs (e.g. labor and materials). For example, assume you purchased a home for $100,000, spent $50,000 on the renovations, and sold it for $200,000. You’d have a gross profit of $50,000 ($200,000 sales prices minus the total of the $100,000 purchase price and $50,000 in rehab costs).
Gross profit is a useful tool for analyzing a deal’s potential, but it doesn’t represent your actual take-home profit. For that, you need to calculate a flip’s net profit. Net profit deducts all the additional expenses to any flip outside of the actual rehab. These include holding costs (e.g. utilities, property taxes, insurance, loan interest) and the sales transaction costs (e.g. transfer taxes, agent commissions, title fees, capital gains taxes, etc.). Assume all of these additional costs totaled $30,000. Now, what seemed like a $50,000 profit in the above example becomes a $20,000 net profit. And net profit represents what you actually put in your pocket after a deal.
After explaining this difference, I’ve seen an average of $30,000 in net profits on individual house flips. This includes all of the houses I’ve personally flipped and the ones flipped by our customers. Now, I also need to emphasize that this number represents an average. On some deals, I’ve seen net profits as high as $70,000. In others, I’ve seen no profit.
But, for planning considerations, $30,000 serves as a reliable average for home flippers. Specifically, this number can help you with long-term deal planning. For instance, say you need $100,000 in annual take-home pay to live comfortably. As such, you could reasonably project that you’d need to complete three to four deals per year to make a living as a house flipper.
Successful real estate investors understand that you need to calculate a deal’s profitability before beginning it. While real-world results will certainly alter these initial estimates, this budgeted profitability will tell you whether a deal makes sense to pursue. And on paper, calculating a flip’s profitability is pretty straightforward:
I stated it above, but calculating profit on a house flip may seem straightforward on paper. In reality, accurately estimating all of the above numbers can be extremely challenging for new (and experienced) investors. As a result, we’ve developed the Advanced Deal Analyzer, a house flipping profit calculator. This proprietary tool does all of the above calculations for you, quickly telling you whether a deal will be profitable or not.
With our calculator, investors just need to enter a property’s 1) purchase price, and 2) repair costs. The calculator interacts with our massive database of properties and historical transactions to do everything else. Specifically, after entering these two inputs, the Advanced Deal Analyzer will tell you:
These results save a tremendous amount of time by providing a quick assessment of profitability. And the Analyzer also gives you a detailed breakdown of projected costs. This breakdown gives key insight into a deal’s costs. You can use this insight to maximize your profit by seeing where and how to best commit funds to a deal.
I’ve used the above to talk about how to figure out average profits on house flips. Now, I want to discuss a few house flipping mistakes to avoid if you want to maximize your profit. In other words, rather than asking about average profits, investors should ask how people lose money on deals. Specifically, investors regularly make three mistakes that significantly undercut a deal’s profits. By understanding these mistakes, you can take steps to avoid making them yourself.
First, investors often overestimate a property’s ARV. When conducting their initial deal analysis, investors use extremely optimistic ARVs. For example, let’s say a property, once rehabbed, will have three recent comps: 1) $250,000, 2) $275,000, and 3) $300,000. Looking at these comps, you could certainly project a high-end ARV for your property of $300,000. But, what if your home sells for the low-end $250,000? You’ve just taken a $50,000 swing in your projected profit. For most deals, this would mean switching from a profit to a loss.
Bottom line, when projecting ARVs, investors need to think like accountants, not gamblers. Accountants apply a conservative, low-ball approach to estimates. Gamblers go with the best-case scenario. If you incorporated the $250,000, low-end comp into your deal analysis, you’d be in a much better position. If the numbers still work with the low-end comp, go with the deal. And if you end up selling for the high-end comp, great, you’ll have a larger profit.
The next common house flipping mistake investors make also involves an underestimate. More precisely, investors often underestimate a project’s rehab costs. For example, say you buy a place for $100,000 and have solid ARV comps projecting a resale value of $250,000. If you estimate rehab costs of $50,000, that leaves you with a gross profit of $100,000. Even factoring in the additional holding and transaction costs, that should still leave you with a sizable net profit.
But, what if your rehab costs actually cost $60,000? $75,000? $100,000? At what point does your deal cross over from profit to loss? Once again, successful investors need to approach rehab costs like accountants, not gamblers, and take a conservative approach. And assuming you’re not a contractor, you’ll need to work with a contractor to develop these conservative estimates.
With experience, you may get to the point where you can accurately estimate a project’s total rehab costs. But most investors need input from a contractor for accurate forecasts. As such, before developing a deal’s total budget, you need a contractor bid (or several) providing you an accurate estimate of a property’s total rehab costs. And, you may end up getting a range of costs from several bids.
In developing your total flip budget, I recommend taking the conservative approach and using the highest contractor bid. That way, if the rehab comes in lower, you’ll net a higher profit. But, worst-case scenario, it comes in on-budget and still leaves you with a profit.
The final common profit mistake investors make comes on the front end of deals. A flipper will run the numbers on a property and pay too much for it, thinking that he or she can make up those costs during the rehab or sales process. Unfortunately, this assumption ignores the real world. When rehabbing a house, unanticipated problems will inevitably occur. A water heater will break. Or a roof will cost more to replace than originally anticipated. Or any other number of problems will pop up.
Smart investors account for these contingencies. They incorporate some “flex” into their budget. If you fail to include this budgetary buffer, your rehab will certainly come in over budget. That’s just life. So, don’t assume everything will go exactly as planned, letting you cut some back-end costs.
Having said that, investors cannot plan to make up for an overpayment over the course of a deal. If you pay too much for a property up front, just assume that those additional costs will cut directly into your profit. Instead, investors should ask: how can I avoid overpaying for properties?
I mentioned it briefly, but savvy investors don’t look for deals on the MLS. They develop marketing strategies to find off-market properties. Investors want to look for three characteristics to find a good deal:
Okay, but how do you find these sorts of deals? I highly recommend checking out our Investor’s Edge software. We’ve compiled a database of over 160 million properties that investors can search for off-market properties. And, our property information includes the current equity in those properties, meaning you can quickly and effectively narrow down potential deals.
Regardless of your unique situation, if you want to successfully flip houses, you need to run the numbers before a deal. This prevents you from picking and choosing deals based on emotion. Instead, developing a conservative budget—and avoiding the above major mistakes—will make sure you A) only pick the best deals, and B) maximize profit on the deals you do choose. In that vein, average profit matters far less than your accurately budgeted profit on a potential deal.
Learn how to make money flipping real estate with us by attending our next webinar.