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A fix and flip deal works when the after-repair value (ARV) is high enough to cover the purchase price, renovation costs, financing costs, closing costs, and holding costs — and still leave a profit margin that justifies the risk. Run the numbers before you make an offer, not after.
The core formula is simple:
Profit = ARV − Purchase Price − Rehab Costs − Financing Costs − Closing Costs − Holding Costs
If the result is not a number you would accept as payment for the time, risk, and capital involved — the deal does not work at this price.
ARV (after-repair value) is what the property will sell for after the renovation is complete. This is the most important number in your analysis and the one most commonly inflated by optimistic investors.
How to determine ARV:
Your ARV should be the number a conservative appraiser would land on, not the best-case scenario. Build your deal on the conservative number.
The rehab budget is where fix and flip deals most commonly go wrong. Underestimating renovation costs is the single biggest reason flips lose money.
How to build a reliable budget:
Rough cost benchmarks (vary significantly by market and scope):
Never use the seller's estimate of what the repairs cost. Never use your own casual walk-through without contractor input on a major rehab.
Hard money financing costs have two components:
Interest: Monthly interest on the outstanding loan balance for the hold period.
Example: $250,000 loan at 11% annual rate held for 6 months = approximately $13,750 in interest.
Points: Origination fee charged at closing, expressed as a percentage of the loan. 2 points on a $250,000 loan = $5,000.
Total financing cost on this example: $18,750.
The hold period matters. Every month the property sits — waiting for permits, waiting for contractors, sitting on the market — adds interest cost. Model your hold period realistically, not optimistically.
Closing costs (purchase + sale):
On a property purchased for $200,000 and sold for $350,000, closing costs total roughly $2,000–$4,000 on the buy side and $21,000–$28,000 on the sell side.
Holding costs:
These costs are often underestimated. Budget them line by line.
Once you know your costs, work backward from the ARV to find the maximum price you can pay and still hit your target margin.
MAO = ARV − Rehab − Financing − Closing Costs − Desired Profit
If your target profit on a deal is $40,000 and the costs work out as:
MAO = $350,000 − $45,000 − $18,750 − $25,000 − $40,000 = $221,250
If the seller wants $250,000, the deal does not work at that price. That is useful information before you make an offer.
There is no universal answer, but experienced investors typically want:
Thin margins are dangerous. A 5% profit margin sounds fine until the market softens, the renovation runs long, or the property sits on the market for 90 days instead of 30.
Hard money financing is a line item in your deal analysis — not an afterthought. The rate, points, and loan term all affect your final profit number. A loan at 11% with 2 points costs more than one at 10% with 1.5 points. The difference on a $300,000 loan held 6 months is meaningful.
This is why comparing lender terms before committing to a deal — not after — matters. Broker Cheetah lets you see real quotes from multiple lenders on your specific deal so you can build your analysis on actual financing costs, not estimates.
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