Comparing ROI: House Flipping vs Mutual Funds
The most important things to consider for house flipping or any investment opportunity are risk and reward; in this case, reward denotes the projected return on investment or maturation rate and risk is a complicated enough topic to justify the hundreds of financial resources developed specifically on the subject matter. Today, we’ll look mostly at the potential rewards to be gained from two common, but very different, investment opportunities: Growth stock mutual funds and flipping houses.
Looking At & Beyond Returns
Before we jump into potential returns, maturation periods, and other return-based factors for both investments, it is important to note that in both cases the stability and risk-factor associated with the investment can vary wildly, depending on a few key factors. For instance, a growth stock mutual fund centered around companies that are seen as stable earners is going to perform far differently than a similar fund focused on rising stars in the tech industry; likewise, flipping houses in an already-hot market that are bought at a high price and sold with relatively low margin comes with far less risk than buying the same property in a less hot market. The takeaway here is that, generally speaking, the two investment types can carry a similar amount or risk, depending on environmental factors.
The average annual return on investment for a growth stock mutual fund is somewhere between 10 and 12 percent, but typically hovers closer to 10. If you diversify your portfolio and manage your risk well, then you can plan for around 12 percent growth. House flipping, however, comes with a much higher margin for return at around 20 to 25 percent. It is very difficult to provide even reasonable projections for house flipping return rates, largely because the data is far less accessible. For example, there are experienced house flippers that don’t care to chart every single expense that goes into a specific house or that buy materials for multiple projects at once, likewise, there are individuals that put in “sweat equity” to maximize returns and others that employee entire teams. In reality, house flipping can net returns on investment in excess of 50 percent or cause a loss in equity, it all depends on the property, the investor, and the market.
Factoring In Effort
As mentioned above, sweat equity is always an option for house flipping. Even if you work a day job, simply by spending some time on your project on nights and weekends can pad your profit margins, netting you a larger eventual return; whether or not you actually pick up a hammer, you will have to be much more involved with your flip than you would a mutual fund, where your contribution is limited to opening an email and viewing the report once a month. For the uninterested investor, mutual funds are absolutely the way to go.
The largest difference between mutual funds and house flipping is maturation, and this is where the true potential of house flipping kicks in. If we examine a $100,000 investment in both a 10 percent return on investment mutual fund and house flipping at 20 percent, we can see the true wonder of maturation. First, the mutual fund will generate a 10 percent return on investment using compound interest to make more than the $10,000 profit you would expect to see throughout the year. The end total of the mutual fund after one year, its maturation cycle, is $110,471.31 (before any fees/taxes/etc).
The maturation period of your house flipping, however, is determined by the time it takes to purchase, renovate, and close on the sale of the property, which is almost always less than a year; we’ll go with a modest average of 3 months, which includes a quick close, 4-6 week renovation, and standard 45 day closing sale period. In this instance, after 3 months your total profit (at 20% ROI) would be $120,000. The beauty lies in the fact that you could re-invest this $120,000 in 3 more flips to round out the year. If each one nets you a 20 percent return on investment, then you’re looking at $207,360 dollars at the end of the year, a more than 100 percent annual ROI. This would involve 4 seamless flips that all generated large returns, but that is entirely doable for an experienced flipper.
In order to get to the self-sufficient point where you’re buying your house flipping projects in cash, you’ll need initial funding for your projects. At Private Lending Group, we want to help you generate huge returns on your investment property with loans to help you close on houses quicker than a traditional bank loan. In the above example, the months it would have taken for a traditional mortgage loan to help you close on an investment property could lose you that property or limit your projects to only 3 a year, taking a huge cut in your annual profits. Get the investment property funding you need quickly with our experienced private Chicago lenders.
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