We closed on a house in Kyle, just south of Austin, TX this week. Here’s how we made a fairly aggressive return on a quick flip with relatively low risk (no leverage, no renovations).
In a previous article, I laid out why private real estate offers immense amounts of opportunity if you are patient, and make sure you buy right. By doing this, you take advantage of what I believe is the best thing about real estate (a wide bid/ask spread). Last week, we demonstrated the perfect example of this when we sold a house for a 13.8% profit in 27 days. From a before and after standpoint, this flip is about as boring as it gets for one reason - we didn’t renovate the house at all. Here’s a before and after that would never see a minute of airtime on HGTV.
For principal projects at Denali, most times we will buy a house, fix it up, and sell it in a few months. This is a great, simple value-add strategy that can produce great returns in itself. However, from time to time, we come across deals that require little to no improvements where we can buy and then relist the house for a profit.
Fix and Flip Profits
Here are the numbers.
Sure in the grand scale of the investment universe, 27K isn’t much money to some investors. But here’s how deals like this get very interesting from an investing perspective.
1. Risk vs Reward
Risk vs Reward is a perpetual balance in investing. You demand more reward for more risk, and vice versa. Deals like this are basically arbitrage (risk free returns). You are buying and selling with little improvements very quickly, minimizing your exposure to market fluctuations. Buying at the bid, selling at the ask. Additionally, we didn’t use any leverage, which is often the unsung, true hero in most real estate returns profiles.
2. The Timeframe
I will add one more component to the investing dichotomy introduced in the previous point - Risk vs Reward vs Time. The amount of time it takes to generate certain returns is another important aspect of an investment decision. For instance, value-add apartment deals can have a 3-7 year timeframe, so an investor has to accept saying goodbye to their precious capital for a good chunk of time. In addition to liquidity concerns, the “time” aspect leads to the last, arguably most important aspect of investments like these.
3. Fix and Flip IRRs
Here’s where residential flips get interesting. Here are the overall metrics of this deal.