What's the difference between getting a property under contract with the intent to market to flippers vs landlords?
Obviously if the price is right, both will be interested. Should I stick with my formula (ARV * .70 - repair costs (including fudge factor) - my profit) to come up with what I want to get the property under contract for at all times or should I run it from a landlords perspective as well?
When marketing the property, should I market it as what the potential flipper can make and let the landlord figure out the numbers for himself, or should I market it was both perspectives?
I think it absolutely makes a difference.
The 70% formula is a rehabber formula. It is designed to quickly figure holding costs, resell costs, and profit margin.
When I first started I used to figure all my numbers and percentages every time I looked at a potential rehab. When I came across the 70% formula I noticed it came out roughly with the same number that took me 20 minutes to figure but instead it took me about 10 seconds.
Again the 70% of ARV minus repairs formula (or one of its cousins) is an easy shortcut for rehabbers to figure out their maximum offer to make 15-20% profit, which I've found to be roughly industry standard.
If you are looking to sell a property as a rental, a 70% discount might not be enough for it to cash flow OR it might cash flow adequately at 80% or even 100% of ARV.
I just had this conversation in another thread, but one of my best rental properties I bought for full retail value. It was a fourplex and because of the seller's financing terms, it netted me $200 per door per month the first year. With the property rented out and in good condition, my measly $5,000 down payment seemed magical. It was well over a 100% ROI.
Point being, landlords priority is not equity. It's cash flow. If you want to market to landlords then learn what they are looking for. Learn their cash flow numbers. 70% of ARV might be a good rental or it might not. You need to learn when it is and when its not if you are going to market to landlords.
A deal is a deal and if you get it under contract using the math as stated above you'll have interest from rehabbers and land lords.
One thing you don't want to do is try and calculate their profit margin on a flip, IMO this doesn't make any sense and I'll tell you why. Some people over rehab and some under rehab. Some may use Granite for the counters when it should have Formica, others might put in carpet when they should put in hardwood floors.
The point is, even if you know that the home is in a lower end area there is no telling what your buyer plans to do. For this reason, I recommend you inspect the property for the major repairs (foundation, hvac, roof, etc.) and come up with a ball park estimate for repairs and welcome them to do their own inspection and calculating.
Jeff
I think it absolutely makes a difference.
The 70% formula is a rehabber formula. It is designed to quickly figure holding costs, resell costs, and profit margin.
When I first started I used to figure all my numbers and percentages every time I looked at a potential rehab. When I came across the 70% formula I noticed it came out roughly with the same number that took me 20 minutes to figure but instead it took me about 10 seconds.
Again the 70% of ARV minus repairs formula (or one of its cousins) is an easy shortcut for rehabbers to figure out their maximum offer to make 15-20% profit, which I've found to be roughly industry standard.
If you are looking to sell a property as a rental, a 70% discount might not be enough for it to cash flow OR it might cash flow adequately at 80% or even 100% of ARV.
I just had this conversation in another thread, but one of my best rental properties I bought for full retail value. It was a fourplex and because of the seller's financing terms, it netted me $200 per door per month the first year. With the property rented out and in good condition, my measly $5,000 down payment seemed magical. It was well over a 100% ROI.
Point being, landlords priority is not equity. It's cash flow. If you want to market to landlords then learn what they are looking for. Learn their cash flow numbers. 70% of ARV might be a good rental or it might not. You need to learn when it is and when its not if you are going to market to landlords.
Ryan- So should I be focusing on one or the other when starting out? I feel like throwing away rental property leads is a waste. Are wholesale deals primarily done with flippers as opposed to land lords?
Here are some other questions:
How do I verify the rents for a property? The seller is using a property management company, is it reasonable for me to ask him for 12 months of payment history?
If I do a drive by of the property, and then confirm the rents and confirm it will cash flow, do I want to see the inside of the property BEFORE putting it under contract or should I go ahead and put it under contract and then get out under my inspection contingency if something turns out different than expected?
If I have literally no one on my buyers list for the area the rental is located in, should I pass on the deal now and wait until I have a buyers list in place or get it at a good price and then aggressively market the property?
I figure it out as 70% of ARV first.
Then I compare that to the number I come up with when I do an Income/Expense report.
That is:
{(Monthly Income) minus
(PITI+10% of mo/rent for vacancy+10% of mo/rent for repairs)} minus (Repairs needed to get it in good shape)
Then I use a 50 multiplier which gives a rough estimate of the 50% rule. So, $800/mo for rent times 50 - repairs needed to get it into good shape.
Of course you subtract your profit from each of these formulas to get your offer price.
Then, when I approach individual investors I have whatever scenario best meets their expectations.
I certainly think you should go inside before you buy it.
I usually give them a ballpark figure over the phone first, then if we are in the same ball park I'll schedule a time to view it. Once you figure out what you're doing, reputation is everything!
You should know what it would rent for but if you're going to buy a property where the seller claims it rents for way more then you think it would, the renter always pays on time, never needs anything repaired and they are on a long term lease then you would definitely want some proof to show your end buyer.
Getting a GREAT deal will bring the buyers. But, you need to know how to find the buyers. If you don't know how to find them then maybe you should figure that out first. For rentals, you can call all of the For Rent signs in that area and classified ads.
Sorry for beating a dead horse here, but you guys are really helping me out and helping me think through things and I greatly appreciate it.
My first round of marketing went well, over 5% response rate, but I felt like I didn't attack my leads and thoroughly vet them like I should. I'm trying to look at things from every possible angle on my second time around. Here's a quick example:
Seller with 6 properties, located literally all over town (all in rental type neighborhoods). I can see how much he paid for each. When I do a quick calculation on a couple of them, using the 50% rule for expenses, what I believe to be a reasonable rent number, and accounting for $100 in cash flow per month, I come up with a maximum offer that's 25K less than the 58K he originally paid for the property in 2005. This doesn't even take into account any repairs that would be necessary upon purchase.
So my gut tells me, he over paid and there is simply no deal to be done here. However, the logical side of me is screaming that I'm missing something because this is the 3rd person I've been contacted by who has had 5+ properties and they have ALL been this way.
I feel like everyone who's a landlord knows the 50% rule, pays attention to their monthly cash flow, and a made a sound investment from start. Obviously this isn't the case, but I feel like I'm not trying my hardest to come up with a creative solution when I can't make it work.
I know that 90% of leads lead no where, but I expect landlords to be somewhat savvy investors and to own properties where the numbers are at least close. Am I likely making a calculation mistake or is it more likely that people really do over pay for properties this frequently?
I go to a monthly real estate meeting.
Most of the "wannabe" landlords, don't know about the 50% rule.
Mortgage is $400 each month, I'm collecting $500 rent each month, I'm making money!!!
You don't know how many times I've heard this.
Ray in Ct.
Eric most of the landlords I talk to are the same way.
Most landlords that I talk to are nowhere near as educated in REI as the good people on this site. Advantage, YOU!
Investors also have different goals in mind that justify the amount they pay for properties. Some investors are just wanting to build up a nest egg so that when they retire they have cash flowing properties with 100 % equity. These kind of investors don't plan on retiring for at least 10-15 yrs and just want someone in the house to pay their mortgage for them so that when they retire they have a house that's been paid for. However, when they need to liquidate early they will have some difficulty finding a cash buyer to cash them out.
Some fell for the appreciation trap, or rather got stung, when the bubble popped!
Then there are the ones who are just kind of ignorant and make poor choices due to their lack of knowledge.
In the future you may want to consider mixing in a few short sales and sub2's.
Ray in Ct.
I know what you mean. I've stopped explaining the 50% rule because they look at me with a blank stare and think I'm the moron.
There was a time when I bought with absolutely no consideration of the 50% rule. I bought on instinct. I knew that I was getting a great price compared to current market values, I knew that values would go up in the near future and I knew that I would have a positive cash flow. I made enough money that I did not have to worry about the nickels and dimes, the write offs were good and I cashed in when the market popped. Doesn't mean the investor/landlord is not as smart as you, maybe he or she does not need to worry about the rules or doesn't care to be strapped down by them? -- Dawn
I want to understand the rules and fundamentals of investing so that I know how to value each deal. If I can learn to spot a good investment property without relying on the assumption of appreciation, I believe I will have learned how to truly be an investor and spot value. This will help me immediately when trying to wholesale and over the long term as I transition to long term investments myself.
And here's the thing, if you are marketing a property to several landlords, who may or may not use the 50% rule or the income/expense approach, that you purchased using the 50% rule then how awesome is this deal going to look to them!
If they were willing to pay $80,000 for that $100,000 property then how are they going to feel about getting it for $50,000? They are going to love you and will always be looking for your next offering.
Now with your self-interest in mind, once you figure out what they'll pay for a property you can adjust your price point accordingly.
The main thig is that the 50% rule should be what you use if and when you ever purchase rental properties to buy and hold.
As to the initial question, why not market to both, do your homework to answer questions to either market, you don't have to give details in your efforts, just their attention! Bill