How a Pro Flipper Actually Calculates Profit

TLDR

The offer formula is simple: max allowable offer plus rehab plus profit equals after repair value. The hard part is setting the profit number. Percents alone do not work because they break down at the price extremes. Use a minimum lump sum floor, adjust for risk using the scale of livability, and separate your lender income from your investor income.

Table of Contents

• The Basic Offer Formula
• Why Percents Break Down
• The Three Factors That Matter
• Using the Scale of Livability for Risk
• Stop Counting Every Paycheck as Investor Profit

The Basic Offer Formula

The max allowable offer formula is one line:

Max allowable offer + rehab + profit = ARV

If you are buying a house for $200,000, putting $50,000 into it, and selling for $300,000, your profit is $50,000. On $250,000 of cash in the deal, that is a 20 percent margin.

That is the number most people chase. Twenty percent return on money in. Sometimes they hear 15 percent is fine. Sometimes they hear 17 percent. Someone tells them 20 percent is a home run. All of those answers are kind of right and kind of useless, because percents alone do not tell you whether a deal is good.

The formula is the easy part. Setting the profit number is the work.

Why Percents Break Down

Two real examples from my own deals. Names of the properties and exact addresses are not the point. The numbers are.

Deal one. Cosmetic renovation. Acquired for $21,000. Rehab maybe $30,000. All in at $51,000. Probably the best deal I have ever bought. The house had some rough conditions walking in but the systems were fine, so the work was mostly cleaning, paint, and flooring.

Deal two. Huge renovation. Took the roof off, built a second story. Acquired for $350,000. Rehab $250,000. All in at $600,000.

Now apply the classic 20 percent rule to both.

On the cosmetic, 20 percent is $10,000. That is not worth the insurance, the holding costs, and the time. On the second story, 20 percent is $120,000, which is fantastic because a second-story build has enough risk to eat that margin if you are not careful.

Same percent, two completely different outcomes. The formula is incomplete.

Common Mistake

Copying a percent rule from somebody else’s YouTube video without thinking about your price point. The 20 percent rule works great in the middle of the range and falls apart on both ends.

The Three Factors That Matter

When I set a profit number, I think through three things in order.

One. Minimum lump sum. My floor is $30,000 per deal, or 10 percent of cash in, whichever is higher. On the cosmetic $51,000 deal, $30,000 is a 59 percent return on cash. Fantastic. On the $600,000 second-story deal, 10 percent is $60,000, which is tight for the risk but workable.

Two. Risk profile. I look at how close the house is to livable when I buy it and how much work separates me from the next buyer.

Three. Lending structure. Whether I am using hard money, private money, or cash, and how I account for interest and points in the formula.

Those three levers set the profit input that goes into the max allowable offer formula.

Percent is a starting point. Lump sum is a floor. Risk pushes you above the floor. Lending tells you what you are actually earning.

Using the Scale of Livability for Risk

The scale of livability is how I visualize risk on any deal.

Imagine a line. On the right side of the line is livable: a house a normal family could move into tomorrow with a bank loan in place. On the left side is not livable: a house no bank will touch and no retail buyer will consider.

The distance from your starting point to the livability line is your risk. Every job between the two points is a chance for something to go wrong, blow the budget, or add months to the timeline.

On a cosmetic that is already livable, I can take my minimum floor and feel safe. On a second-story addition, I want real cushion because the risk list is long: weather during the roof-off, permit surprises, structural issues, contractor availability for a specialized job, appraisal risk on an enlarged footprint.

Key Concept

Monetize means you can either sell it or rent it. The closer you are to monetization on day one of ownership, the less risk the deal carries. New construction is the furthest from monetization, which is why I do not build from scratch.

The scale also tells you when to walk. If you are looking at a house so far left of the line that every sub on your depth chart would be working on it for a year, the math has to be aggressive and the buy has to be a steal. Otherwise pass.

Risk is not a feeling. It is a measurable distance on the scale of livability.

Stop Counting Every Paycheck as Investor Profit

This is the trap that kept me undercounting my costs for years.

If you fund your own deal, you have two roles. Investor and lender. If you manage your own construction, that is a third role: contractor. If you sourced the lead through mail or door knocking, that is a fourth role: wholesaler. If you are licensed, that is a fifth role: real estate agent.

Each role is a separate business with a separate paycheck.

People say, “That is a great deal for you because you do the construction.” And I used to nod along. In reality, that statement means you are getting paid as the contractor and not as the investor, which means one of your businesses is losing money while the other looks fine.

Pro Tip

On every deal, list the roles you are actually playing. Pay each role separately in your mental accounting. A deal that only pays your contractor self is a bad investor deal, even if the total cash looks okay.

For example, a $250,000 deal where the rehab is $50,000. If I am the contractor on that job at cost plus 20 percent, my contractor paycheck is roughly $10,000. That is separate from the $30,000 minimum I expect as the investor. Separate again from interest if I funded it myself. Run the math this way and you will find that some deals you thought were great were really just you working for yourself at an hourly rate.

A deal has to pay your investor self. Every other paycheck is a bonus, not a substitute.

FAQ

How do I know if a deal hits my minimum when I am just starting out?

Run the offer formula with a 20 percent target and your minimum lump sum, whichever is higher. If either number works, the deal is worth pursuing. If neither does, walk. Do not negotiate yourself into a worse number.

What if I do not have cash and need hard money?

Build the interest and points directly into the offer formula. At 12 percent interest and three points for six months, that is real money that reduces what you can pay for the house. The ARV does not care that you are new. Price for the reality.

Why 10 percent and $30,000 as minimums?

Below 10 percent, the math has no margin for surprises, and surprises always happen. Below $30,000 lump sum, the project is not worth your time unless you are stacking volume. Those are my floors. Yours might differ, but pick them deliberately, not by accident.

Does this change for BRRRR rentals?

No. Same formula. The exit is a refinance instead of a sale, but you still need enough profit baked in to pull your cash out. If the refi appraisal comes in low, your margin is what saves you.

What is the difference between profit margin and annualized return?

Profit margin is dollars out divided by dollars in. Annualized return adjusts that margin for hold time. A 20 percent margin on a six-month flip is a 40 percent annualized return. On a 12-month flip it is 20 percent. Long holds are more expensive than they look.