Average Net Profit for Flipping a House in 2022
Table of Contents
- Net Profit Margin
- How much should I pay for an investment property?
- Factors to consider when determining average net profit
- How much money/capital do you have to work with?
- Locating properties
- How much time do you have to work with?
- Housing Market Conditions
The ultimate goal of house flipping is to purchase a property for below-market value, renovate it, then sell it for a profit. This process can be, and has been, extremely profitable for many investors over the years, if done correctly. But, what exactly is the average net profit from flipping one house?
Net Profit Margin
The net profit margin measures how much net income or profit is generated as a percentage of revenue. This includes the profit you make after you sell the house once all expenses associated with the flipping process have been accounted for.
Each house flipper’s net profit margin will differ based on their individual circumstances. If the investment property you’re interested in is listed well below-market value and won’t cost a significant amount of money to renovate, you’re likely to turn a pretty good profit on it. Conversely, if the property is overpriced and will still require significant upgrades, there’s a good chance that you end up losing money in the transaction.
How much should I pay for an investment property?
Unfortunately, there is no set amount that you should look to pay for an investment property. Every situation is different and is dependent on your own personal circumstances. However, there are some general guidelines that you should follow when determining the right price to pay for a house.
Ideally, you should spend no more than 70% of the property’s ARV (After Repair Value) on the property. In other words, your anticipated profit margin should be at least 30% of the final sales price.
The ARV, short for After Repair Value, is the estimate of a given property’s value after all repairs and upgrades are completed. It is used to determine the margin between a home’s current value, and the value it will have after renovations. We call this a “rule”, but it isn’t a totally rigid one. It should serve as the basis for a thorough market analysis, but it can be a very powerful tool in your decision making process.
However, there is an important caveat to consider. A 30% anticipated profit margin does not necessarily mean you walk away with exactly 30% in profit, as some may imagine. Part of the reasoning behind the 70% rule is that you need a cushion to cover any expenses left at the end of the day; these could include agent commissions, title inspections, lender fees, and any other miscellaneous expenses included in closing.
Buying a property, especially a house to flip, is never easy. There are always many different factors to keep in mind when making your decision. It goes without saying that how much you’ll pay is the number one factor among them.
When you’re planning on investing more in the interest of making a property more viable on the market— that is, renovating and flipping the property— you’re always going to need to account for the costs incurred by repairs and upgrades.
Your profits all rest on the relationship between your expenses and the final sale price, and the 70% rule serves as a simple way to determine how much you’re willing to invest, and whether those investments will be worth it. The 70% rule works so well because it is so simple: there’s very little to complicate your calculations. It forces you to consider the two most important numbers in house flipping, those being the ARV and the repair costs.
None of this is to discount the significance of other numbers, such as the soft costs you may face during the renovation process. However, you really do need to keep the ARV and your repair costs in mind every step of the way, even before you embark on a more thorough analysis. If anything, the 70% rule can be thought of as the first preliminary step of that analysis, a simple way to determine whether investing your time and money is likely to pay off in a given case.
Factors to consider when determining average net profit
How much money/capital do you have to work with?
One of the most obvious factors that will impact the amount of houses you are able to flip in one year is the amount of money, or capital, that you have to work with. Even though you are able to fund up to 90% of the investment property with a hard money loan, you will still be required to invest some of your own personal money.
As you can probably imagine, capital plays a huge role in the amount of houses you’re able to flip consecutively and simultaneously. For example, if you have an abundance of capital at your disposal, it may be possible for you to flip multiple houses at one time. On the other hand, if you’re working with a limited amount of money, you may only be able to take on one house flipping project at a time, requiring you to work in a linear fashion, as opposed to simultaneously.
The amount of money, or capital, that you have to work with when flipping houses will vary from person to person, and it’s important to remember to strategize what will work best for you financially, and to not overextend yourself and take on more than you can handle.
Your ability to locate undervalued properties can also affect the amount of houses you’re able to realistically flip. This is one of the most difficult steps in the house flipping process, and if you can find a way to quickly and efficiently find homes that have the potential to be flipped, you can maximize your average net profit.
There are a number of ways to locate houses for below-market prices in your area. The first thing you should consider doing is using your network. While it is not always a 100% guarantee that you will find a house to flip this way, there’s always a chance that you may find a lead or two by communicating with others in your community. Believe it or not, word of mouth is still important, and if you know the right people, there’s a possibility you can find out about deals as they are hitting the market.
An excellent way to connect with other real estate investors and realtors who have access to valuable information is to join a community real estate group. The chance of locating a great property alone makes it worth joining, and it can also serve as a fun and informative way to network with others in the industry.
How much time do you have to work with?
Time can be an enormous constraint when it comes to determining your average net profit from house flipping.
First off, you need time to find undervalued properties to purchase. Having a real estate agent assist you can speed up the process, but at the end of the day, finding the right property takes time.
Next, you’ll need time to renovate and repair the property. This can take anywhere from two to six months, depending on the condition of the house and the severity of the renovations needed.
Lastly, factor in your own availability. Are you a full-time house flipper, or do you use it as a side hustle? As a full-time flipper, you may be capable of committing almost all of your time into your business, enabling you to flip upwards of seven houses in a single year. If you only flip houses on the side, you may only be able to fix and flip one to three houses in a single year, depending on the time commitment required by each project.
Housing Market Conditions
Another important factor to consider when trying to determine your average net profit from flipping a house is the current conditions of the housing market. Unfortunately, this is something that you as a flipper will have little to no control over.
In a hot housing market, a house flipper may be capable of reselling a property within just a couple of days after putting it on the market for sale. However, they might struggle to find houses to flip because there is so much competition for houses in that market.
Alternatively, in a cold housing market, a house flipper might be able to find plenty of houses to purchase, but their flips have the potential to sit on the market for months while waiting for a buyer.
In conclusion, the average net profit from flipping a house will vary amongst investors. Each investment opportunity comes with its own individual circumstances. The price of the house, renovation costs, and market conditions are all factors that could affect the net profit from flipping a house.
If you play your cards the right way, you can make anywhere from $30,000 to $60,000 in net profit from flipping a house. There are a multitude of factors involved, but with the right tools and team around you, you may have the opportunity to be even more successful than you imagined in the house flipping business.
Adam Smith has spent the last 5 years in the Private Money Lending world helping real estate investors secure financing for their non-owner occupied real estate investments. When he’s not thinking about real estate, Adam is an avid Jazz music fan and fisherman.