How to Analyze a Fix & Flip Deal

Thanks for tuning into another episode. I'm Derek Marlin, your host of Raising the Flipping Bar, a podcast dedicated to all things fix and. We're coming to you here and wanted to talk about deal analysis, and this could be probably a 10 part episode, but we're gonna try to keep it very top level, very 30,000 foot type of perspective.

Then we'll be adding supplements along the way to help you really get deep into deal analysis. Um, but kind of a quick recap of our last episode, which was getting your financial house in order. You wanna definitely take inventory of all of your. You want to dial in and, and reduce as many of your debts and liabilities as possible.

And again, we kind of talked about leverage versus debt. So kind of reduce the debt, be smart about your leverage. You then want to talk about, or think about, I should say, setting aside reserves. So three to six months for business reserves and ideally six to 12 months for personal reserves. Um, and then you want to figure out, okay, how am I gonna find the money to do these fix and flips?

So you've got a sliding scale from cash. Down to lines of credit. The next tier is private lending and then also hard money lending. So there's pros and cons to each Duffy. Go back and, and check out this last episode, but you wanna make sure you've got that pre-qualified and you're ready to, to buy, whether it's your first fix and flip or your, you know, a hundred or 200 fix and flip.

And lastly, you want to assemble your team of professionals. So again, think about getting your financial house in. So once you've got that all set, you're ready to start analyzing deals. And I think some people will ask, okay, well why aren't we going over finding deals first before analyzing deals? And this is something that I actually teach in our one day Academy.

And what that is, is to me, if you don't know what a good deal is, why waste your time trying to find a deal? Because you're gonna fumble through it and in my opinion, make a bad decision. So let's dive into deal analysis. Really, the best way that I wanna look at it is what is your sweet spot? So I'm gonna define our sweet spot at Elevation as a company, and then you as the individual investor or other companies out there can kind of.

Put your specific taste and your specific stamp on what you want to focus on. So for us, the context as we're setting the stage for this episode are we actually do condos and townhomes all the way up to single family flips. And so for the most part, we're ideally for condos and townhomes, we're doing properties that are selling under $400,000.

Again, this is in the metro Denver market. So for those of you listening in other areas that's probably either super cheap or super expensive. The condos and town homes that we do are on average about a 30 to a 60 day project, and some people are pricing, oh man, that's pretty fast. Or maybe slow, depending upon how fast you are.

This is us seven years into our business with a small staff to make things go really, really quickly. Typically, we're doing rehab that's a little more cosmetic in nature, and we're doing properties for condos and town homes that are usually under 1000 square. Jump to the single family rehab side of things.

So those are single family homes. Um, they are typically not attached. So they're not duplexes, they're not town homes, they're not condos. They're single structures. And for us, usually we are buying under $600,000. Um, haven't bought anything in the twos in quite some time, but essentially we're buying between three and 600,000.

And then when we sell them, our personal sweet spot as a company is we max out at about $750,000 When it's fixed up, I've done a couple that have sold or listed in the sevens, and then they run up into the eighths and the nines back in the heyday of, of 2021 in, in early part of 2022. But that buyer is a much more discerning buyer.

So we find that the best way, and really one of my favorite terms is called the velocity of money, which is how fast can we turn over our capital? We stay at seven 50 and below on average, that takes us about two to three months to finish those projects. And they're full rehabs. They are doing essentially every aspect of the house from the carpet, the paint, you know, removing a load-bearing wall in a kitchen.

It also is doing typically two out of the major seven systems of a home. So it might be a roof on one and a window on another. It might be a sewer line on one property, and it might be finishing a basement. But for the most part, it's doing roughly two systems. If you're having to replace every system, we still definitely do those.

You just have to have a bigger profit spread or the margin between how much am I buying it for and how much am I selling it. Um, the size of our properties for our single families is, we're normally doing about, we max out at roughly 3,500 square feet and smaller. We've done a couple bigger ones.

Actually, our most profitable flip ever was in the city of Littleton, and it was just over a 5,000 square foot home, but it took us five months to complete that. So again, our sweet spot is kind of 2000 to to 3,500 square foot home. We are focused on, as we say it, we call it property redevelopment, which is kind of our term for fix and flip.

We do not do scrapes, which is essentially a new build. You're taking an old home, you are scraping it, um, and demolishing it and building something brand new. We don't do pop tops, and that's where you've got the first story of an existing structure and you add on a whole second. I've only done one of those and it was kind of a train wreck cuz we're waiting for permits through the city and county of Denver.

And it took us 14 months to do the house. Definitely not our sweet spot. Some people are great at 'em, not us. And most times we don't add square footage to a property other than finishing a basement. So I know some colleagues and they do really, really well, where you've got an existing property and you add a, a, you know, primary suite on the back of that.

So you're adding the main bedroom. And the main bathroom. But you're definitely adding a lot more time for permits. You're adding a much higher caliber of contractor that you have to work with, and you're adding time. So again, our sweet spot is we're in and out in, in two to three months. We're doing the vast majority of the property and, and we're doing half of those systems.

So again, kind of wanna set the stage for what we define are the deals that we go after. You just need to make your own definition of what's a good, you know, target for. Let's talk about, um, the key metrics, and I know we've said it in a couple different episodes. We focus on metro Denver, so think about a roughly a 50 mile radius, which essentially encompasses everything that is not Boulder, Fort Collins or Colorado Springs.

We kind of do everything in between those areas and, um, and we really focus on three key metrics to define what is a good deal. When we're diving into this deal analysis episode three key metrics, number one is roi, and that stands for return on investment. Again, I kind of harken back to my finance days and our flips on average return between 8% on the low end and typically 14% on the high end.

So the reason 8% actually doesn't sound like a ton, but they're definitely properties that are larger in scope. You're paying more for the property up upfront, you're paying more to renovate it, and it's taking a little bit more time. That still might net you, let's say $70,000 in profit, which is a lot of money obviously, but because you're spending a lot and spending a lot to rehab, your ROI is down.

Versus you might do a condo, like we're finishing a condo right now, um, at the tail end of the first quarter of 2023. And it's, uh, projected to be a $42,000 profit, but it's actually a 15% roi cuz we didn't have to pay a ton. We don't have to pay a ton to rehab it and we're doing it pretty darn quickly cuz it's not very big.

That's just kind of the different ends of the spectrum. Of that eight to 14%, again, you need to define what's the best bet for you. Net profit is our number two metric and that is how much profit are you making when you back out every single expense, and you'll really come through the journey with us on how analytical.

And detail oriented we are. When you're factoring in what your net profit is, you need to take into account every expense that you're spending on the house. So whether it's the purchase, the renovation, all the finance costs, property taxes, utility bills, staging, um, bringing a handyman in. Once you go on our contract to fix the two or three little things that your buyer wants to get you to the finish line, you have to take into account every single.

So for us, net profit is, is kind of tiered in four different, you know, structures. Again, I'm a sports guy at heart. I worked for an NFL team, but I grew up playing baseball. So for us, let's equate it to baseball. So a single in our world is 25 to $35,000 in net profit, typically in the condo and town home world, or very, very cosmetic in nature.

We had one house that we did where all it really needed was a kitchen and it needed to be painted, cuz overall it was in really good shape. And so we did that. We're in and out quickly. The ROI was a little lower, but our net profit was high cuz it took us two weeks to. Jumping up to the next one, the double, if I'm hitting a double.

On average, we're doing a net profit of $45,000 up to about $55,000. That's getting into more of a full renovation and a full rehab. We're typically do, that's the single family type property and that is, um, doing those two major systems. So again, we might be doing a furnace, a hot water heater, and a new ac.

And we might be doing a roof, or we might be doing a sewer line and we might be doing some, some structural improvements to, uh, to finish out the basement. So on average, that's our two or three month project, and that's kind of a double when we get into the triple, that for us is normally making between 55 and about $75,000 in that profit.

That starts to be a, a very healthy profit and a great project. On average. It's, it's everything from a cosmetic perspective. And it's usually most of the major systems. So it's three or four high dollar ticket items that you're spending money on. And then normally for us, that's at least another month to six weeks on the project.

So for, for our world at Elevation, that's a three or four month project, and we're, we're turning that into a triple a lot of times when we were. Going in and underwriting our numbers, we were aiming for a double, and the property sells above asking, and it becomes a triple. We're super excited, but you've gotta really rely on comps or comparable sales to decide how much is this thing gonna sell for on the back end.

And then your last one obviously is, is, you know, the classic baseball analogy, it's the home run For us, we define a home run as anything over a hundred thousand dollars in net. On average for us, I would say probably one to two times a year deals become home runs. Um, we don't normally, again, pencil them in up front as a home run, but we definitely are able to see the market.

Do strategic improvements, stay on time and on budget, and it becomes a home run. Um, we don't factor that in, you know, all the time. So that's kind of your four different tiers to help you structure. Okay, what is a good deal when it comes to net profit? Um, and again, kind of putting those book ends on how much am I spending on these houses?

We're in that $300,000 to roughly that $750,000 price range. Um, would love to get cheaper houses. I just can't really normally find them, and I get a little leery when I go above seven 50. For me, that typically means that I just need to make it a home run. And so we normally get outbid by other investors who are willing to take a lower profit and, in my opinion, take a higher risk.

So again, you need to define that for you, the audience as the beginning investor. Intermediate and growing your business, or you're a total pro and can run circles around us and are making 200 grand on every deal. And call me and let's partner up. Um, the number three metric, but actually number one for our decision making is what we call dollars per day.

And what that is, is it's purely just the amount of net profit that you're making divided by the number of days that you are owning a property. And by owning, it's the day you buy it, all your renovation time. Putting under our contract to sell it and getting it to the finish line. So truly kind of what we call close to close is helping to dictate dollars per day.

And the reason, not that I created that metric, but I, I kind of helped develop it with my business strategist, is it really helped us to differentiate, well, we've got two deals coming in side by side, and do we want to go for deal A or deal B if they're coming down the pipeline and let's say we didn't have enough.

To, to buy both of them. And so the way that I always bring this up as an example is if I'm gonna give you an example of do you wanna make 42 grand on a property in net profit or do you wanna make 58? Well, the answer obviously is it depends on how big of a project is it. A lot of times if I can get through that $42,000, you know, project, like I talked about with our condo, I'm gonna do that cuz theoretically I could do that twice.

And make more than $58,000 in one bigger project. Again, all things being equal, we know that deals don't come down the pipeline at the exact same time, but dollars per day really help us define that metric. And so for us, the minimum net profit, um, and, and dollars per day that I want to make is $400 in net profit a.

We'd really like to shoot for 500 and above, but kind of our, our baseline or our minimum is $400 per day in net profit. So that's really how we look at it, is we look at dollars per day, we look at net profit as number two, and we actually look at ROI as number three. I still wanna look at ROI because if you think back to the market and the finance side of things of where you could put your money, you need to be careful because if you're making only a 5%.

You could buy treasuries right now. I mean, you could probably even put your money in a CD and make 5% virtually risk free, far less brain damage and do nothing. So in real estate investing, you ideally need to be in that 10 to 15% ROI range, and that's actually why we look at that as the third metric. Um, so let's jump into why is it important to stick to your guidelines?

What I find with a lot of the, the folks that we coach and consult, Are you spend hours and hours and hours analyzing deals and they're just not good deals. So it's okay to analyze deals, but you should spend that five minutes on what we actually call five minute math that we'll get to in future episodes and just move on to the next one.

You don't want to do that, and you also more importantly, don't wanna make the numbers work just because you're plugging them into a spreadsheet. So don't spend tons and tons of time on just deals that don't work. The other thing is analysis paralysis. So you probably heard that phrase before, but that really means it's just the fear of even getting started.

If you know your numbers and you've got spreadsheets to determine that, and you've got guidelines of what you're trying to focus on, it'll help you get into doing more deals or just discarding the deals that don't make any. And the other one is the A R V, which stands for After Repair Value, and we'll dive into that far, far deeper in future episodes.

But that's figuring out how much does this sell for when it's done, when compared to other properties that are similar in size, similar in style, and similar in bedrooms and bathrooms. So you're comparing kind of truly apples to apples as they. And not apples to spinach as one of our former employees used to say.

Um, so you wanna look at, at how much can I sell this thing for on the backend and not take just the one highest comp and the outlier that sold six months ago. Um, the other thing is you wanna dive into how do I get through these properties quickly? And I kind of mentioned it before, but I'm gonna give you just a quick down and dirty nice metric on how to decide, hey, is this a deal that I need to spend more than five minutes analyzing?

And that's your overall profit. And so for that, it is for cosmetic properties where you're doing, again, kind of the fancy stuff, but not the major systems. On average, we need about $150,000 in spread from how much I'm buying it for, to how much I'm selling it for, and that will work itself out to fit those metrics that we talked about earlier.

If you're doing a major renovation, a whole house renovation, it's taking you three or four months, you know, you're spending over a hundred grand in rehab. We normally need a $200,000 spread from where I'm buying it to where I'm selling it. So if we think about that $200,000 spread, that really is critical because that gets us the net profit that we want, the dollars per day that we.

And ideally that roi, but if you don't have that, you're just working on deals that, in my opinion are aren't too thin. Again, that's metro Denver. So we might be thinking about other, other markets where like I've got family that lives in the deep South, for example, and what they can pay for a house and what they can pay for labor always makes me super, super jealous.

So they could probably have healthy profit margins. With barely a hundred thousand dollars in spread in metro Denver. We have a labor shortage. We have supply chain issues. We've got an imbalance in supply and demand. That's just the profit spreads that we see that we need to make these profitable projects for us.

Then let me give you some quick napkin math numbers to use as well to determine how much am I gonna spend fixing up these properties. On average, we're spending $40 per square. For cosmetic remodels. So again, think back to the condo example where obviously in a condo community, you're not touching the roof, you're not touching the sewer line, you are just doing the interior guts of your house, and we have a thousand square foot condo.

We're gonna spend on average 40 bucks a square foot. Sometimes we can spend a little less. Sometimes we can spend a little more, but that's your quick napkin math to make sure, okay. Is this a deal worth writing an offer on going and seeing in person and taking that next level? If we go to full rehabs, we're then spending on average about $65 a square foot.

Sadly, over the last three years, our project manager has done a great job of, of updating our budgeting tool and the sheet that we use to, to how much are we gonna spend renovating properties. And we're on version 5.0. It's not going backwards. Um, you know, labor I think is coming down just a touch in Metro Denver, but not too terribly much.

So we are spending on average, 65 bucks a square. So if we're thinking about a 2000 square foot ranch, um, where again, we're doing everything, we're probably finishing a basement, we're probably doing two out of the six or seven major systems, we're spending, you know, 130 to 140 grand. Um, I should also bookend that.

With giving you some, some deeper information on, we are typically using general contractors. So you could cut your cost by doing work yourself. You could cut cost by hiring, you know, the man or woman who's gonna do a good chunk of the work themselves and then sub out your major system. So whether it's your plumbing, your electric, your mechanical, um, but time is also money.

So in our world, all these numbers that I'm quoting you are to have general contractors. And really then it boils down to knowing your numbers. You wanna really have those rehab costs on the napkin math level dialed in before you see properties in person. Um, you want to have your holding costs figured out.

So we talked about getting your financial house in order. You need to know the amount of interest that you're paying on any given project. And then you need to know your sales and your listing cost. So how much are you paying your real estate agents? How much are you paying the title company to close the deal staging, um, property insurance.

So you need to know all those numbers so that you know, how do I analyze a deal and is it a good deal for me? Um, let's take a little bit as we kind of wrap up this tail end of this episode of, uh, you know, diving into deal analysis, which is, um, talking about hitting your initial metrics, talking about, um, you know, looking at photos versus doing things in person, and also when to write an offer.

So, again, let's think about kind of us as a company we're talking to in year seven. We've got a small staff so we can churn through things a lot faster. I do wanna acknowledge when I first started as a one person. I was obviously underwriting the deals myself. I was looking at them far more often in person than before I had them.

Either an offer written on them or under contract, and then you kind of move up the scale as you get more experience. So ideally, if you can hopefully learn from some of my, um, not mistakes necessarily, but just my learning curve, it would be looking at as many deals on the mls, um, either yourself or through your real estate partners that you're working.

Trying to see photos, trying to see videos, working with wholesalers that are gonna give you that information to budget appropriately, and then decide, do you wanna write an offer or do you wanna see in person? If you just look at the pure kind of time you spend running around looking at deals, how many properties can you look at at once?

You know, if you are driving between a couple places, spending an hour in each one, you're looking at maybe four properties a day. Um, the math just doesn't work in, in this competitive metro Denver market. You need to look at a lot more deals than that. So ideally it's doing as much due diligence upfront, doing it online, looking at photos, and then double checking your numbers and seeing things in person.

Plus, it also helps you kind of keep credibility with other real estate agents, other investors, and other wholesalers, so that you're not kind of wasting their time if you don't know your numbers and you can't pull the. So really keep that in mind. Um, definitely when you go under contract, that's when you dive into the second level of analysis.

You bring instructional engineers, you do sewer scopes, you do roof inspections. So again, we'll have future episodes to dive into that, but knowing your numbers and how to analyze deals is gonna be critical and paramount to your success. Um, this is definitely, as we kind of wind down this episode, I want you to reach out to us.

With questions. Um, definitely always interested in comments too. So I'm, I'm loving to know, or I'd love to know how much other people are spending on their rehabs in Metro Denver and kind of other tricks of the trade. This is where we want to build that community. So whether it's email, whether dms, you know, text, whatever, reach out to us, give us a call on the phone.

Um, for those of you that reach out to us, we're actually also happy to provide our deal analyzer spreadsheet. So again, I'm kind of of that growth mindset. I want other people out. Using this spreadsheet and then we all hopefully grow together. So reach out to us and we'll get you that deal Analyzer spreadsheet.

Um, but again, as we close out this episode, know your numbers, dive into that kind of napkin math before you go to a deeper level, and then you can get into analyzing those deals. So again, I'm Derek Marlin. Thank you for tuning in to raising the Flipping Bar, and we'll catch you on the flip side.