House flipping has never been more trendy than it is right now. With a great real estate market in most of the nation, many are looking to see what the house-flippers are doing to be so successful. House flippers take real estate investing to the next level, and are getting rich quick!
To be a successful house flipper is more than just finding great homes, it is about making the most ROI and profit on their flips. House flippers track their return on interest differently than most investors. Learn more about the different ways House flippers track ROI below!
What Are ROI and ARV?
ROI or ‘Return On Investment’ means the percentage of invested money that’s recouped after the deduction of associated costs. In other words, it is the amount of money gained from an investment.
A basic ROI formula looks like this. ROI=(Gain−Cost)/Cost
Depending on the investment your ROI can vary and ROI formulas can work differently for real estate investors. Commercial investors might find the above formula more useful than house flippers.
Another key factor for how house flippers look at their ROI is through after repair value. After repair value is simply the project value of a home after repairs have been completed. Hard money lenders in Arizona suggest using ARV to determine what the profits will have to be for the flip.
Here is the formula: ARV = Property Purchase Price + Renovation Value
So how do house flippers track ROI differently?
How House Flippers Calculate ROI: The Cost Method
Most house flippers buy their properties in cash to flip or rent their properties. By using cash they can decrease their overall investment with no interest paid. Real estate investors suggest using this method if you want more cash flow for a property, not equity.
House flippers prefer this method because all the expenses related to repairs, renovations, and purchases are included. For real estate investors it’s crucial to track any of the expenses involved in renovating and repairing the property.
House flippers who paid in full or cash prefer this method, as it gives a more complete picture of what your ROI needs to be for a flip.
For real estate investors and house-flippers using financing for their investments, the out of pocket method is most effective.
How House Flippers Calculate ROI: Out-of-Pocket Method
Many house flippers use hard money loans Arizona to finance their flips. This makes it easier to begin work on a project, and make sure that repairs and renovations are completed on time.
While using a hard money loan or financing for your investment can make it easier to start your project, how you track your ROI will change on your financing. Another benefit of financing a flip is that there is a possibility to earn more than you would if you pay cash.
House flippers using loans for flips or rentals would use the out-of-pocket method for ROI.
Here is the formula: ROI= Annual Cash Flow / Total investment cash
While this method offers more flexibility for rentals, the annual cash flow can negate the cost of the flip. This method only counts the total money house flippers put into a property, out of their own pockets.
This differs from the Cost method as it only accumulates the cash flow, to the total cost. The reason for the higher ROI is attributable to the loan, as the investors save themselves from this initial cost.
These two methods make sense for house flippers to track their ROI. From cash to expense, and after repairs to profits!
Return on interest is important for any business owner to know what they can expect to see on their investments. No matter the investment it is important for house flippers to also know their numbers and they can do this with the different ways they track ROI.
Here is how house flippers track their ROI!
- What Is ROI and ARV: Return on interest and after repair value are extremely important for any house flipper. Using the after repair value for their home, house flippers can gauge how much their property will be worth after a repair is complete.
- The Cost Method: House flippers paying in cash calculate their investment differently. House flippers prefer this method because all the expenses related to repairs, and purchases are included giving a more complete picture of their investment.
- Out-of-Pocket Method: House flippers looking to use financing or hard money loans for their flip prefer this method. This method only counts the total money house flippers put into a property, out of their own pockets.
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How Do You Track Your ROI?
About the Author: Catherine Way graduated from Michigan State University with her Bachelor of Advertising, with a specialization in Graphic Design. She is a content marketer for business, mortgage, and real estate industries. She currently writes and reports for Prime Plus Mortgages – Hard Money Lenders in Arizona