Take the purchase cost (include closing, exclude commission)
Add the cost of interest at 14% or 1.17% per month (equals ROI if invested elsewhere)
Add cost of material
Add cost of labor (include partner labor)
Set the purchase price
Deduct real estate commission of 6% from purchase price
Split of profit is 50/50 between investor and GC
Sample:
purchase price: $130,000
Close cost: $1,500
Total: $131,500
6 months to market date: $131,500 x 7% = $140,705
Material Budget: $40,000
Labor Budget: $50,000
TOTAL: $230,705
Market Price: $295,000
Sales commission: $17,700
Profit:
$46,595 divided by 2 = $23,297.50
Taxes on each share = 30% = $6,989.25
Profit after taxes: $16,308.25
AREAS that contractor can control: Materials and labor
AREAS that investor can control: Purchase price, real estate commission
GC is made whole before it reaches market. Investor is not made whole until property is sold. As to market date increases, investor gains more from the interest, GC loses potential profit each month that the the home is not on market.
If GC is in excess of labor/material budget, then the excess comes from the GC's share of profit upon sale. If the GC is below the labor/material budget, then the savings is added to the GC's profit upon sale.
In the above scenario, the Labor and material are likely too high, and the expectation of sales price is too high. Revamp at $25K material and $30K labor, with expected sales price of $265K.
