12. Calculate the return on investment (ROI)
The ROI is the total profit after considering tax, divided by the total amount of money you put into the deal, calculated as a percentage. The money you put into the deal consists of:
» Renovation costs
» Holding costs
The net profit is the sale price minus exit costs and tax. The ROI is the after-tax profit divided by the money you put into the deal as a percentage.
For example, a $400,000 property purchased with an 80% loanto- value ratio might have entry costs of $100,000 (don’t forget your own time). The renovation and holding costs might total $50,000 (don’t forget your own time). So the total investment is $150,000.
If the sale value is $525,000, then the gross gain before exit costs and tax would be $125,000 ($525k minus $400k).
Subtract from this the reno and holding costs and you have $75,000. However, the exit costs might be $12,000, leaving you with a net gain of $63,000.
Assume the property was flipped within 12 months, at a marginal tax rate of 30%, and you’re left with $44,100 in hand after tax. That means your ROI is 29.4% ($44,100 divided by $150,000 as a percentage).
If your marginal tax rate is 30 cents in the dollar, it’s unlikely a part-time job would earn you $44k over the project timeframe. And a 30% ROI is better than money in the bank. But is it the best investment you can do?