How to Project Profits in Underwriting a Flip
TLDRProfit math on a flip is not one number. It is a minimum dollar amount plus a minimum percent return, adjusted for risk, with your construction and wholesale fees counted as separate businesses. My rule of thumb: $30,000 minimum profit or 10% minimum return, whichever is higher, and never confuse vendor pay with investor pay.
Table of Contents
- The Offer Formula
- Why Percent-Only Math Breaks
- The Minimum Rule
- Risk Adjustment Using the Scale of Livability
- Lending and Why It Is Its Own Business
- Paying Yourself Across Multiple Roles
- FAQ
The Offer Formula
Every flip starts with the same equation.
Max Allowable Offer + Rehab + Profit = After Repair Value
Rearrange it and you solve for the offer.
MAO = ARV - Rehab - Profit
Plug in real numbers. You buy a house for $200,000. Rehab is $50,000. Sell for $300,000.
| Line | Amount |
|---|---|
| ARV | $300,000 |
| Purchase | $200,000 |
| Rehab | $50,000 |
| All-in before profit | $250,000 |
| Profit | $50,000 |
| Profit margin | 20% |
Twenty percent return, $50,000 in cash to your pocket. Sounds good. Most community members ask if 20% is the home run or the floor. The answer is “neither, depending on the house.”
Why Percent-Only Math Breaks
Take two real examples.
Park View. A light cosmetic renovation I bought for $21,000. Human waste in the living room, windows boarded up, but no real damage. Paint, floors, haul out the trash, and it was ready. All in at about $51,000.
A 20% return on that deal is $10,000. Ten thousand dollars for acquiring and flipping the best deal I have ever bought. That does not even cover a mistake. Not worth doing.
Pontiac. A big project where I took the roof off and built a second story. Bought at $350,000, put $250,000 into renovation, all in at $600,000.
A 20% return on Pontiac is $120,000. That is a great flip for the size of the project. And I would have taken it gladly.
Same 20%, completely different meaning. Twenty percent on a tiny deal is pocket change. Twenty percent on a huge deal is a win. The percent alone does not tell you whether to buy.
Percents scale. Your need for a base hit does not.
The Minimum Rule
Here is the rule of thumb I actually use.
Take the higher of: $30,000 lump sum profit, or 10% return on the money in the deal.
Run both examples.
Park View, $51,000 all in:
- 10% of $51,000 = $5,100
- Minimum dollar floor = $30,000
- Use $30,000. That is a 60% return on the money, which is a great flip given the light risk.
Pontiac, $600,000 all in:
- 10% of $600,000 = $60,000
- Minimum dollar floor = $30,000
- Use $60,000. That is a bigger number because the project is bigger.
The rule flexes with the size of the deal. Small deals are protected by the dollar floor. Big deals are protected by the percent floor. Either way, you never do a flip for a tiny profit just because the percent looked good on a small base.
Pro TipWrite your minimum rule down. Stick to it. The only time you break it is when there is a clear, written reason, like a long-term neighborhood play or a vertical integration benefit. Not because the deal “feels close.”
Risk Adjustment Using the Scale of Livability
Not every deal has the same risk. The scale of livability is how I measure it.
The scale is a line. To the right of the line the house is livable. A bank will give a normal buyer a loan on it. To the left of the line the house is not livable. Only investors and cash buyers can take it.
The further to the left, the more risk.
| Distance From the Livable Line | Risk Level | Example |
|---|---|---|
| Already past the line | Low | Park View: clean and paint |
| Just short of the line | Medium | Needs kitchen, bath, floors |
| Far to the left | High | Major mechanical, structural, or additions |
| All the way left | Highest | New construction from dirt |
If Park View is low risk because the house was already near livable, I can accept a smaller margin. If Pontiac is high risk because I am rebuilding the second story, I need a bigger margin to compensate for what could go wrong.
That is why new construction is the hardest place to make money. You are the furthest possible distance from the livable line. Every day of the project adds holding cost before there is anything to sell.
Risk and required return move together. The further left, the more cushion you need.
Lending and Why It Is Its Own Business
Here is where a lot of investors leak profit without realizing it.
When you buy a house with your own cash, you still have a cost of capital. If you had used a hard money lender, you would have paid interest. That interest is the price of the money.
Example. You bring $250,000 of your own cash to a deal and hold it six months. Hard money would have cost about 12% annually, so $2,500 a month in interest, or about $15,000 over six months.
If you fold that $15,000 into your investor profit, you are quietly paying yourself as the lender and the investor at the same time. That hides the real return on your investor role.
Keep them separate.
- As the investor, you earn $30,000 minimum or 10% on the money
- As the lender, you earn the interest you would have paid a hard money lender
- Both of those are real returns, and neither cancels the other
Common MistakeRolling up lending fees, construction markup, and real estate commissions into one “investor profit” number. It looks big on paper. It also hides the fact that the investor role might be unprofitable on its own.
Paying Yourself Across Multiple Roles
If you DIY the renovation, you are acting as a general contractor. A GC typically charges cost plus around 20% on a project. On a $50,000 renovation, that is roughly $10,000 of GC pay.
If you sourced the deal yourself through direct-to-seller marketing, you did the work of a wholesaler. A wholesale fee on a good deal might be another $10,000 on top.
If your spouse or your own brokerage sells the house, that is the real estate agent role.
Total roles you might fill on a single flip:
| Role | Typical Pay |
|---|---|
| Investor (risk capital) | $30,000 or 10%, whichever is higher |
| Lender | 2 to 4 points plus 10% to 14% annual interest |
| Wholesaler (deal sourcing) | $5,000 to $10,000 assignment equivalent |
| General Contractor | Cost plus 20% on the rehab |
| Real Estate Agent (sell side) | 2% to 3% of sale price |
Each one is a real business with a real market rate. When somebody tells you “this deal is great because you can DIY it,” they are usually asking you to work the GC role for free while calling the labor “profit.”
Do not work a role for free just because you are also the investor.
FAQ
What about the 70% rule? Does the minimum rule replace it?
No, they do different jobs. The 70 percent rule is a fast napkin shortcut for sizing up a deal in under a minute. The minimum rule is what you use to actually underwrite once the napkin math looks okay. Use both. Start with the 70% rule, confirm with the minimum rule.
How do I know if my rehab estimate is right?
Walk the house with a scope of work template. Price every line item. Pad 10% to 15% for surprises. If you do not know construction yet, pay a contractor for a real walkthrough estimate before you commit. A wrong rehab number breaks every downstream calculation.
What if the deal only clears the minimum by $5,000?
Pass. The minimum rule assumes your estimate is right. If reality falls inside the noise of your estimate, you have no margin. You want the deal to beat the minimum by a comfortable cushion, not squeak by.
Should every role always get paid on paper?
Yes. Even if all the money ends up in the same account, break out on paper what you earned as investor, lender, GC, wholesaler, and agent. This is how you know which roles are actually profitable. If your GC role is breaking even, that is important to see.
I am just starting out. Where should I focus my profit math?
Pick the simpler version. Fifteen thousand minimum profit, or at least break even on interest and fees with a clear path to more on future deals. First deals are tuition. The goal is to not lose money, learn the process, and then raise your minimum on the next one.