Dropmodel Release: An Inside Look at Our House Flipping Model
We're excited to announce the launch of our House Flipping Profitability Model. Consider this your ultimate guide to getting to know this model and how to best use it for your house flipping endeavors. First we’ll provide an introduction to house flipping, then move on to the model and its use, including who uses this model, when it is used, why it is used, and how it is constructed. We’ll also cover what results are produced and how it can be used to help investors, brokers, and others make better, faster real estate decisions.
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An Overview of Flipping Houses
Flipping a house (or any other type of single family residence, like a townhouse or condo), is one of the most popular real estate investment strategies in the United States. It involves purchasing, usually adding value, and re-selling with a short hold period (time between purchase and sale)—all in the hopes of capital gains and, if an investor is lucky, some appreciation.
While the exact hold period isn’t defined, it is typically between three and eight months, with some lasting 18 months or more. Anything over six to eight months may seem long to some, but in parts of the country where permits are required and projects undergo an extensive gut renovation, 12-14 months is conservative.
Most investors that are flipping a house care about a few things above all else: net profit (in dollars), return on invested capital (ROI), profit margin, and time. The House Flipping Profitability Model will produce these figures (and much more) in the results sections.
The House Flipping Profitability Model
But first, what is a model? There are many types of resources used for real estate analysis, and often real estate participants will have different definitions and understandings of each. Here’s our breakdown:
Model: Thorough analysis using an abstract representation of one or several possible scenarios for a property. This type of resource usually consists of an input phase and a comprehensive presentation of results. Time to complete: 5-10+ minutes
Quick Calc: A simplified model or other calculator that requires fewer inputs than a model and presents fewer, often less detailed results. Quick calcs usually consist of single-figure results with less accuracy due to fewer inputs. Time to complete: 15 seconds to 2 minutes.
Tool: Any instrument that can aid a real estate professional and that is not used to construct a possible or past real estate scenario. Tools often support one or several inputs used in models or quick calcs, or help make other decisions related to a property or business case. Time to complete: varies widely based on the tool and use case.
The House Flipping Profitability Model consists of seven input sections, collecting the data necessary to get an accurate projection of profitability. We look at everything from hold period and acquisition costs, to leverage and renovation costs, to tax considerations and expenses related to sale. As with all of our models, most of the inputs are flexible, allowing for multiple methods of data entry.
As you move through the House Flipping Profitability Model, you might see Dropmodel Insights—helpful facts and figures that we can derive from your inputs—pop up.
A quick note about this model: We didn’t include the option to specify the period (year, month, week or day) in which certain events occur. The only time-based input is hold period, so this model will not reflect the timing of cash inflows or outflows during the project. Investors focused on a house flip strategy are often solving for profit, project cost, equity required, and related metrics and ratios, rather than time-based metrics, such as net present value and internal rate of return. This is in part due to shorter hold periods and the relatively minimal impact from the application of discounting and other data that accounts for time value of money.
The Results phase consists of five sections. We start off with a project summary, so you can view high level information at a glance.
We’ll provide a project overview with sources and uses of funds and detailed performance metrics, like profit, ROI (actual and annualized), % of ARV less repairs, net to future sales, and more. Toggle between views to account for pre- or post-taxes and actual vs. annualized returns.
A profit sensitivity analysis section lets you quickly adjust renovation costs, hold period, and/or future sale price (ARV) to see the immediate impact on profitability.
At the end, you’ll see a project breakdown with a summary of information, including all inputs and insights for quick reference.
Categories of Costs in the Flip Profitability Model
As would be expected, almost all of the inputs in the House Flipping Profitability Model are required in order to estimate the total costs of the project. Here’s a breakdown of the costs you should know about to make an informed house flipping decision.
Costs related to the purchase: Includes the purchase price, closing costs or other costs associated with the due diligence or purchase of the subject property.
Loan costs: Includes loan interest payments, origination fees, discount points and other associated costs
Renovation/repair costs: Includes direct costs for materials and labor and contractor overhead (if applicable)
Other hold period costs: Includes costs incurred during the hold period that are not covered by the other cost categories (e.g., property taxes, insurance, utilities)
Costs related to re-sale: Includes sale commissions, closing costs or other costs associated with the sale of the subject property.
The first four cost categories are used to determine out-of-pocket costs. If a loan is applied, they may not actually be out of the investor's pocket, but they will need to be covered by either the investor’s equity contribution or loan proceeds. The last cost category, costs related to re-sale, are assumed to be deductions from the sale proceeds rather than funded by debt or equity.
Let’s Get Flipping
The House Flipping Profitability Model can be used to project future scenarios, win the support of lenders or partners, to show the potential of a property, or even to store the facts and figures of a deal in progress or deals you or your clients have completed in the past.
We’re constantly adding new models, quick calcs and tools, enhancing existing ones, and adding helpful articles and tips from other professionals that are using Dropmodel to make better, faster real estate decisions. Sign up below to be included on future updates. We hope to hear from you soon!