BiggerPockets

Hello All,

Since I am a newbie I wanted to run my "first pass" deal analysis methodolgy using the "rules" that I have come across in the forums past the more experienced users. I have seen some of the discussions in the forums regarding the "rules" and do not wish to provoke any more heated arguments. I understand that they are just general guidelines and I want to make sure I am on the right track here.

I have not bought any properties yet but my plan is to focus on acquiring SFH's for rehab purposes in the Houston area, keeping them for 1yr + for rental and then selling so I can capture the tax advantages for properties held longer than 1 year. So, I believe my analysis should be broken into at least two parts.

First, determine if the target property is a suitable candidate for rehab and flipping. For that I would need to know the ARV for the property post rehab based on the comparable properites sold in the area. My offer price would then be 70% ( 70% "rule") of ARV minus estimated rehab costs, correct?

Second, determine if the property will cash flow for the year that it is a rental. For this, I will need to determine rents for this property post rehab using comparable property rental data from the area. Once a conservative rental price for the property can be estimated, then I will need to subtract for expenses and P&I. Using the "50% Rule" the formula would look something like this: Rents - 50% - P&I = Monthly Cash Flow. From here I can calculate COC and Total ROI, correct? From J. Scott's blog on deal analysis I really shouldn't consider any deal where the COC is less than 10%. However, would it be acceptable to shave 1-2% off of this since I should theoretically be capturing a bigger % when I sell? I have not seen a "Rule" for the minimum COC return that would be acceptable.

From here, if the property looks like a "deal" then I can make an offer to lock the property up, get the inspection done and do the real due diligence.

Anyway, this is how my thought process is working right now on deal analysis. I welcome anyones thoughts and insights on this. I'm ready to get started and want to get this area of education knocked out ASAP!

Thanks to all!
Joe

Jon,

Thanks for the feedback. I do plan on managing the properties I acquire myself but I believe I should stick with 50% for now as 1) I am new to this and calculating a higher % for expenses should leave me a little wiggle room when things go wrong and 2) if I understand what I am reading about the healthcare legislation, non-earned income will have a tax of ~3.8% before depreciation can offset it, so adding a few % points for that should help keep me in the black.

Have you heard otherwise about point #2?

Thanks,
Joe

Thanks Edwin. By 10% do you mean purchase price, ARV, what?

BTW, your company sounds interesting.

Joe