I have just been emailed by two of my recent Rich Dad students who are really focused on making their property business work. They are asking all the right questions too. This one relates to how much profit they should be making on their refurbishment projects. This is not a straight forward one to answer, so I have put some considerations down that anyone doing such projects needs to be aware of.
In answer to your question about the returns you are looking for on a refurbishment deal, you really need to consider a few of the following things:
- What return on your investment are you looking for? If a deal requires you to put in £50,000 and you decide that your minimum return on your money for these types of deal is 50% then you would be looking for a profit of £25,000 or above.
- Remember there is also a time element attached to this – are you doing the work yourself or is someone else doing it?
- Some people look for a net return on the final sale price. This varies, some might want a minimum of 10% of back end price as a profit, whilst others look for 20%. E.g. A back end sale price of £150,000 with a 10% return on this price would be £15,000. Others want the profit to be measured as a return against the money they put in.
- Another factor is the level of discount you get on the deal. If you pick up a distressed property with a market value £130,000 (in a distressed state) and the seller is distressed then you are likely to be able to offer less. Lets say, in good condition its worth £155,000. It needs £12,000 of work on the property. The seller and the property are both distressed and the seller wants £130,000. At this price, you are not going to make much more than about £5,000 – £8,000 after costs etc. So you have to negotiate. If you get it 20% BMV (£104,000), now you have some room for slippage on your end profits:
You will likely put around £28,000 or so for the purchase plus your work (£12,000), so you are in for £40,000. With the work and a few other costs your total cost is £104k+£12k+ say £3k Misc = £129,000. This gives you around £26,000 to play with on the profit side. If you decide you want a 50% return (£40,000 in x 50% = £20,000 profit wanted) then you set your lowest sale price at £129,000 + £20,000 = £149,000.
A gentle reminder, if you were to use creative finance such as the Closed Bridging that we have available, then you could bring down the amount of money needed into this deal to between £5000 and £9000. That would mean that with a £20,000 profit, your return on investment would be over 200%! (£20,000/£9000 > 200%)
For those wanting to know more about this – we have a webinar on 14th January at 7.30pm on Sourcing and Bridging Finance. Visit here to register:
Register for Souring & Bridging Webinar: CLICK HERE
So you can see that the answer is never straight forward and depends on your approach and needs at the time of doing the deals. I believe that if you are working a specific template (model) you will find over time that you will know that for a certain deal the profit will be X% of the sale price. That comes with experience.
