This blog is a continuation of our series on how to use our hard money calculator to evaluate a real estate flip, maximize profits and avoid costly mistakes. To read the first installment, please click here. Today we will be covering a fun part: profits, return on investment and my personal favorite – return on the cash you invested in the transaction.
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From many applications for funding that come to us every day, a big portion is for rehab loans in Washington DC. No wonder, the DC rehab market continues to offer profit margins that are rarely available in the surrounding areas. Rehabbers in the DC area have been consistently making money buying dilapidated properties and turning them into beautiful homes. Their continued success, however, is attracting less experienced (and less well-heeled) investors and driving the competition for distressed properties. As a result, DC continues to offer terrific investment opportunities, but is also a market where it’s easy to make mistakes.
As a hard money lender, we are as local as we can be. We only lend in Maryland, Washington DC and Virginia. Why not to expand? – you’ll ask. There are several reasons. For starters, we believe that real estate investing is a local business. The further you stray from home, the less likely you are to understand risks. As a hard money lender in Maryland, we know the pros and cons of each neighborhood. We can effectively advise our borrowers on their potential rehab costs, construction permitting issues and how much time they might need to sell their rehab.
We want all our investors to succeed. A success in real estate flipping means realizing a profit that makes your efforts worthwhile to you financially. It’s a highly personal number. Someone might be content in making 20K per transaction, while others might need double that amount to justify the time they spent. This is why we created our hard money calculator: to ensure that our investors – especially those new to the business – are aware of other costs and do take them into consideration when calculating their potential profits.
The next question you should ask yourself is whether your potential rental property will cash flow. This is why you must understand what the debt coverage ratio is. The debt coverage ratio (DCR) measures the landlord’s ability to make monthly mortgage payments from the income generated from renting that property. It tells you whether a rental will generate enough cash to pay for its expenses. Ultimately, it helps you decide if it’s an appropriate candidate as along term or not.
In our previous real estate investment blogs on flipping homes vs buy-and-hold we talked about why different types of investors are better suited for each strategy. Choosing whether to flip or hold may depend on your financial situation, your goals, and the time you have.
On one side of the spectrum might be a young real estate agent who chooses to supplement her income by flipping several properties a year. She is well-positioned to find a good property by the nature of her business. Her current work doesn’t require her to be in the office from nine to five. In fact, it offers her ample opportunities to efficiently manage her rehab project. Her goals is to boost her income to enjoy a better life style. She also wants to accumulate capital to expand her rehabbing business.