House Flipping Profit: How to Calculate Your Real Return
The number one mistake novice house flippers make is calculating profit as selling price minus purchase price and renovation costs. Experienced flippers know there are four cost buckets - and missing any one of them can turn a profitable-looking deal into a loss. Here is how to calculate flip profit the way the professionals do.
The four cost buckets of a house flip
- Acquisition costs: purchase price plus buying closing costs (title, escrow, transfer taxes - typically 2-3%) plus hard money loan origination points (typically 2-4% of the loan amount).
- Renovation costs: all labour and materials for the renovation, plus a contingency buffer (minimum 15%, ideally 20% for older properties).
- Holding costs: every monthly expense while you own the property - hard money loan interest, property taxes, insurance, utilities, and any HOA fees, multiplied by the number of months.
- Selling costs: agent commission (typically 5-6% of selling price) plus seller closing costs (title, escrow, transfer taxes - typically 1-2%).
Net profit = selling price minus all four buckets. The typical inexperienced flipper accounts for bucket 1 and 2 but significantly underestimates or ignores 3 and 4.
Flip profit formula
Annualised ROI is the critical metric for comparing flips of different durations. A 20% return on a 3-month flip is 97% annualised. The same 20% on a 14-month flip is 16% annualised. They are very different businesses.
Worked example: the numbers most beginners run
Purchase price: 200,000. Renovation: 40,000. Selling price: 300,000. Profit estimate: 300,000 - 200,000 - 40,000 = 60,000. This looks like a 30% return. It is wrong.
The same deal with all costs included
Purchase price: 200,000. Buying closing costs (2%): 4,000. Hard money loan points (2% on 160,000 loan): 3,200. Renovation: 40,000. Holding period: 7 months. Monthly holding costs (hard money interest at 12% annual = 1,600 + taxes 250 + insurance 100 + utilities 150): 2,100/month x 7 = 14,700. Agent commission (5.5% of 300,000): 16,500. Selling closing costs (1%): 3,000.
Total acquisition cost: 200,000 + 4,000 + 3,200 + 40,000 = 247,200. Total holding: 14,700. Total selling: 19,500. Net profit: 300,000 - 247,200 - 14,700 - 19,500 = 18,600. ROI: 18,600 / 247,200 = 7.5%. Annualised (7 months): 14.2%.
The 60,000 estimate shrank to 18,600 in actual profit. This is why experienced flippers use detailed pro formas and demand a higher spread between purchase price and ARV.
The 70% rule
Many experienced flippers use the 70% rule as a quick screen: offer no more than 70% of the after-repair value (ARV) minus the renovation cost. For a home with an ARV of 300,000 and estimated renovation of 40,000: maximum offer = (0.70 x 300,000) - 40,000 = 170,000. This builds in enough margin to cover all four cost buckets and leave a reasonable profit.
The 70% rule is a rough guide, not a formula. In competitive markets with low holding costs and fast sales, flippers might go to 75-80% of ARV. In slower markets or on projects requiring longer renovation periods, 65% is safer.
Holding costs: why speed matters
At 2,100 per month in holding costs, every month of delay on the renovation or sale costs 2,100 in pure carrying expense. A renovation that runs 2 months over budget does not just cost extra labour - it costs the extra holding costs too. This is why experienced flippers prioritise speed: faster renovation, faster listing, faster sale.
Use the Property Flip Calculator
The Property Flip Profit Calculator includes all four cost buckets. Enter your purchase price, renovation costs, buying closing costs and points, holding period and monthly costs, expected selling price, and agent commission. It calculates net profit, ROI, annualised ROI, and a full cost breakdown so you know exactly where the money goes.
Frequently asked questions
What is a good ROI for a house flip?
Most experienced flippers target a minimum net ROI of 15-20% on total acquisition cost, or an annualised ROI of 40-60% (for 4-6 month holds). Anything below 10% net ROI leaves too little margin for cost overruns or a price reduction at sale. The specific target depends on your market, your financing costs, and the risk level of the project.
What are hard money loan points?
Points are an upfront fee charged by hard money lenders, typically 2-4% of the loan amount. On a 160,000 hard money loan at 3 points, that is 4,800 paid at closing. Always include points in your acquisition cost calculation - they are a real cost that many beginners overlook because they appear as a closing cost rather than a separate line item.
Use the tools
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