Benjamin Franklin once said, “An investment in knowledge pays the best interest.” His quip is useful in many scenarios but especially when it comes to investing in fix and flip real estate properties. You have to know what you are getting into before you actually dive in or you risk losing money.

The best way to evaluate whether a given fix and flip property is right for you is to determine three numbers: your investment capital, your budget, and your profit margin. Let’s look at each one individually.

Investment Capital. Your investment capital is the amount of money you have available to you to spend on the property. This amount should include the down payment for the property, closing costs, costs of repairs and renovations, payments on the loan(s) and any other costs you might incur through the fix and flip process. This number sometimes comes from what you have in savings or from a loan, but you can’t just look at what you have. You’ve got to figure out how much it will take to get the property sellable. From here you will determine how much debt (loan you can get) and equity (cash you bring to the table) you will need to see the project through.

Budget. Your budget is the clear, specific delineation of how you are going to spend your investment capital. You need to figure out how much the down payment will be specifically, how much each individual repair will cost, and all the other details. Having a budget will help you save money and avoid unnecessary fixes. Having a budget upfront before you buy will allow you to know if the deal is worth moving forward with. Remember, you make your money on the buy. The market determines what you can sell for at any given time. Its your job to make sure you buy it right to make a worthwhile profit.

Profit Margin. Your profit margin is your net profit after taxes divided by sales for a given period of time, expressed as a percentage. Basically this number helps you figure out how much you can pay for a given property in order to achieve your profit goals. Be realistic with your repair budget, holding costs and marketing time and you will be profitable. Knowing your profit margin upfront can be very helpful in the long run.

Knowing these numbers will help you make an objective and informed fix and flip decision. One of the biggest pitfalls of the fix and flip process is getting emotionally attached to a property and overpaying or over-fixing in order to satisfy that attachment. Numbers are objective and they will help you stay that way too.

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