How to Calculate ROI for Fix-and-Flip Investments

Fix-and-flip projects are all about earning good returns. However, making a profit isn’t as easy as buying low and selling high–it takes careful planning, budgeting, and realistic calculations to ensure your investment actually pays off. That said, one of the most important steps is knowing how to accurately calculate your return on investment (ROI). Today, we’re reviewing how to calculate ROI for fix-and-flip investments, mistakes to avoid, and how to maximize your profits. 

Contents of This Article:

• What Is a Fix-and-Flip Investment?
• How to Calculate ROI for Fix-and-Flip Investments
• Common Mistakes When Calculating ROI
• Tips to Maximize ROI on Your Fix-and-Flip
• Find the Right Lender for Your Investment Property

What Is a Fix-and-Flip Investment?

Fix-and-flip investments are a popular choice for investors who want to make quick profits. These projects involve purchasing a property with a Baltimore rehab loan, making improvements or renovations, and then reselling it for a profit. For this type of project, investors typically look for distressed or undervalued properties that they can quickly upgrade to increase their market value.

The goal of a fix-and-flip project is to complete it quickly and efficiently and then sell the property at a higher price, resulting in a strong return on investment (ROI). That said, while fix-and-flips can be highly rewarding, they also come with risks–especially if costs go over budget or the property takes longer to sell than expected. 

How to Calculate ROI for Fix-and-Flip Investments

If you want to calculate your ROI, you first need to determine the total cost of the investment.

This is the total amount of money you put into the property, including the purchase price, repairs or renovations, and holding costs, such as interest payments on a hard money loan. 

Next, you have to calculate the income generated from the property. For this, take the sale price of the property and subtract any selling expenses, like real estate commissions and closing costs. Once you have those numbers, you can calculate ROI using this formula:

• ROI = (Net Profit / Total Investment Cost) x 100

To find the net profit, you can use this formula:

• Net Profit = Sale Price – (Total Investment Cost + Selling Expenses)

For example, if you purchase a home for $200,000, spend $50,000 on renovations, and $20,000 on holding and selling costs, the total cost of your investment is $270,000. 

Then, if you sell the property for $350,000, your net profit is $80,000. 

From here, we can calculate the ROI using this formula:

• ROI = ($80,000 / $270,000) x 100 = 29.6% 

A good return on investment (ROI) for fix-and-flip projects typically ranges from 20% to 50%. 

Common Mistakes When Calculating ROI

When calculating the ROI for fix-and-flip investments, even the smallest errors can make a huge difference. Here are some things you’ll want to avoid to get the most accurate numbers. 

• Underestimating Renovation Costs
• Ignoring Holding Costs
• Overestimating ARV
• Not Including Financing Costs
• Forgetting a Buffer for Unexpected Costs

Underestimating Renovation Costs

More often than not, renovations end up costing more than you expect. Whether there’s hidden damage, permit fees, or rising material costs, surprise costs can quickly add to your budget. That’s why it’s so crucial to get detailed estimates upfront and plan for extra expenses just in case. 

Ignoring Holding Costs

It’s easy to overlook all the little costs that add up while you’re holding the property. Things like mortgage payments, taxes, utilities, insurance, and HOA fees are all important considerations. The longer it takes to finish and sell the flip, the more these expenses eat away at your profits. So, you’ll want to always factor them into your calculations from the start. 

Overestimating ARV

Every investor wants to think that their property will sell for top dollar. However, that’s not always the case. If you overestimate your after-repair value (ARV), you could end up with a less-than-ideal return. That’s why it’s important to be realistic and base your projections on solid comps and current market conditions. 

Not Including Financing Costs

If you’re using a loan to fund your fix-and-flip project, don’t forget about costs like interest payments, loan fees, and points. These expenses can eat into your profits if you’re not accounting for them from the start. You’ll always want to factor in the full cost of borrowing when you’re running your numbers. 

Forgetting a Buffer for Unexpected Costs

No matter how well you plan your investment, unexpected issues can always arise. Without a financial cushion, even small surprises, like plumbing issues or permit delays, can ruin your budget. It’s smart to set aside at least 10-20% of your total renovation budget for emergencies. 

Tips to Maximize ROI on Your Fix-and-Flip

Maximizing your return is more than just getting a great sale price–it’s about making smart moves throughout every step of the project. Here are a few tips to help you boost your ROI. 

• Buy at the Right Price- To get the best ROI, you’ll want to buy low. Look for properties priced below market value that have strong resale potential once they are renovated.
• Focus on High-Impact Upgrades- Some renovations increase property value more than others. It’s important to focus on upgrades that buyers care about most, such as kitchens, bathrooms, flooring, and curb appeal.

• Set a Realistic Budget- Staying disciplined with your fix-and-flip budget is crucial. After all, it’s easy to get carried away and spend more than you originally thought.
• Know the Market- Knowing what local buyers want in a home can make or break your flip. Research recent sales and find out which renovations people are looking for.
• Work With Trusted Professionals- Good contractors, lenders, and inspectors can make a huge difference in your timeline and quality of work. You’ll want to build a team you can trust to keep things running smoothly.

Find the Right Lender for Your Investment Property

Knowing how to calculate ROI for fix-and-flip investments is just one piece of a successful project. However, that’s not all. Another factor to consider is having the right financing in place. Choosing the right lender can make all the difference in your profitability. After all, every lender is different when it comes to loan flexibility, funding speed, and interest rates.  

Hard money loans are a popular choice for fix-and-flip investors because they provide fast, efficient funding. They’re also easier to get than other loan types, as they rely more on the potential of the property rather than your credit score. 

If you’re looking to get a hard money loan for your next investment, look no further than Maryland Hard Money Lenders. Our team of experienced loan professionals can help you get funded fast, often within a matter of days! Learn more about our lending process or start our initial loan application today!