Congratulations! You have landed a smoking hot deal. But what is the next move? Do you wholesale? Fix-and-flip? Buy-and-hold? Depending on your current investment strategy, the answer may be a no-brainer. However, have you ever taken a step back and asked yourself, “How efficient is my real estate strategy?” Are you getting the most bang for your buck or are you simply running on the momentum of your past? Justin Silverio, who owns an investment company that focuses on rehabbing and wholesaling, was running on this momentum until he realized how inefficient his business actually was. In our recent conversation, Justin explained how one simple mindset change resulted in substantially boosting his profit per hour output and overall efficiency of his investment business.
When Justin first started out, the question that guided his investment approach was, “what exit strategy is going to get me the most amount of profit?” If a lead came in, and after analysis, Justin determined that the resulting profit from a fix-and-flip is $80,000 and the wholesale profit is $40,000, then he would opt for the fix-and-flip option. He never looked at both profit AND the time commitment. However, once Justin adopted this approach, his business changed substantially. Enter ROT.
The metric ROT is Return On Time, and the calculation is simple:
ROT = Profit / Time
Continuing with the previous example, and taking “time” into account, the most effective exit strategy changes. Let’s say that the time investment for the wholesale deal is 6 hours. Then, the ROT equals $40,000 divided by 6 hours, which comes to around $6,600 per hour. On the other hand, a fix-and-flip will require hundreds of hours of time. So, the ROT equals $80,000 divided by a conservative 100 hours, which comes to $800 per hour. Which one would you choose?
As a result of adopting this new “time oriented” mentality, Justin has decided to flip higher-end homes and wholesale lower-end homes, as opposed to his old strategy, which was to flip the majority of the deals. The higher time investment of flipping is worth it on high-end homes, due to the larger spread – and let’s faces it, flipping is fun – but not quite worth it on the lower-end projects.
Besides ROT, there is another reason why Justin decides to flip the higher-end properties and wholesale the lower-end properties. When market cycles change, he finds that it tends to impact the lower to middle markets first and the higher-end markets a little bit later. Justin ran an analysis on the change in property values from 2006 until today. The results showed that properties in the lower to middle markets decreased substantially in 2008 and still haven’t gotten back to the 2006 values, whereas the higher-end home prices did not dip down as much.
This is advantageous when doing projects in higher-end markets because if the market dips, Justin can see the affects in the lower to middle-markets and adjust accordingly.
Moving forward, when analyzing properties and determining an exit strategy, look at not only what is going to result in the most profit, but also what is going to give you the higher ROT. Just this minor tweak changed the course of Justin’s business and has enabled him to make a lot more money in much less time.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.