Flipping houses can be a goldmine when done right. In 2024, investors earned an average ROI of 29.6% on house flips, pocketing about $72,000 in gross profit per deal. But with that reward comes risk. A home’s location, the strength of the local market, and your ability to manage costs all influence the bottom line. To make smart decisions, investors need to get comfortable with key metrics like ROI.
What Is ROI in House Flipping?
ROI (Return on Investment) measures profitability by comparing net profit to the total amount you’ve invested. You calculate it like this:
ROI = (Net Profit / Total Investment) x 100
Unlike gross profit, ROI accounts for all expenses, giving you a realistic picture of what you’ll walk away with. By plugging your numbers into this formula, you can figure out whether a flip makes sense. It can guide how much you spend on renovations, what price you set, and how aggressively you market the property.
Savvy investors use ROI throughout the project, not just at the end. Tracking ROI from day one helps you adjust your strategy when the market shifts or when unexpected costs pop up.
The 3 Numbers You Must Get Right
Property flips come with expected costs that affect the ROI. Focus on three categories.
1. Purchase Price and Closing Costs
Start with the price you pay for the property. To get a fair deal, compare recent neighborhood sales and watch local trends closely.
Then factor in closing costs: fees for title insurance, escrow, and more. These usually add up to 2% to 5% of the purchase price. On a $250,000 property, that’s $5,000 to $12,500 out of your pocket right away. If you ignore these, you’re already behind on profit.
2. Renovation Costs
Renovation costs encompass materials, labor, and permits, all of which can drastically affect ROI. On average, renovation costs surpass initial estimates. That is part of the risk when buying distressed properties, which is also why many experienced flippers refuse to offer more than 70% of a property’s projected value (post-renovations) when purchasing a property. A contingency budget can help relieve some financial burden in the event of unexpected costs.
3. Selling Costs
Selling costs, including realtor fees, closing costs, staging, and holding costs, must be accurate when calculating ROI. Realtor fees typically range from 5% to 6% of the selling price. Holding costs, including monthly mortgage payments, utilities, and property taxes, accumulate over time, which is why a fast sale is ideal in flipping.
ROI Formula in Action
Let’s break down two real-world examples to see ROI in motion.
Scenario A
In this scenario, you purchase a property for $180,000 in an area where homes usually sell for $250,000 to $300,000. Projected renovation costs are $45,000, giving you an all-in investment of $225,000.
Once the renovations are complete, you’re able to sell the home for $275,000. Subtracting your initial investment from the sale price gives you a net profit of $50,000. By dividing the net profit by the investment of $225,000 and multiplying the result by 100, you get an ROI of 22.22%, which is a healthy profit.
Scenario B
For scenario B, the investor underestimates their renovation budget and overestimates the market. They buy the same house for $180,000, assuming the same projected selling range. Unfortunately, they have not looked at recent data, showing homes selling for between $230,000 and $275,000.
Their renovation budget hits a few snags, coming in at a grand total of $60,000 rather than the projected $45,000. This means their initial investment was $240,000. Because of current market trends, the house only sells for $260,000, resulting in a net profit of $20,000. Using the ROI formula, we get a result of 8.33% ROI, demonstrating a tight margin flip.
Dominion Financial’s Bridge loans can help you avoid the financial burden of tight margin flips. We offer up to 100% LTC to qualified borrowers, reducing your initial risks and allowing you to focus on the flip.
Common Mistakes To Avoid
Many of the risks associated with flipping properties are tied to several common mistakes. For example, many novice investors:
- Ignore soft costs (insurance, utilities, etc.).
- Don’t create contingency budgets.
- Focus on gross instead of net profit.
- Underestimate holding costs.
Dominion Financial can help you avoid common mistakes and secure your financing.
Why Choose Dominion Financial?
Dominion Financial Services has over 20 years of investing experience in the real estate market. Our fix-and-flip loan program offers up to 100% LTC with no appraisals and closing in 48 hours.
Holding your property? Dominion Financial offers a DSCR Price-Beat Guarantee so you always get the best rates! Contact one of our specialists to discuss your loan options today.