Where I’m operating (Mostly Northern Virginia) the market is getting very competitive. It’s pretty tough to put fudge factors into your numbers and still be the highest bid. I am working very hard to get my rehab numbers tight and right. I’m pretty confident in my estimates. The only time I would think about putting in some cushin is for a major structural issue, but otherwise, if I’m wrong on my repair numbers then it’s probably going to come out of my profit. That’s why I look for a 20% net margin.

If you can get away with pricing in some overages then I would highly recommend it.

Thanks for the comment.

Justin

The example you use is what I would use for all new flippers unless they are lucky have a large cash reserve. This example is very similar to what all new flippers will experience when asking for funding.

My thought is about adding micsellaneous and overage costs when estimating your maximum buying price. I typically add anywhere from 10%-20% in repair costs just in case. Is there a certain point, whether it’s cost of repairs or purchase price of the property, when you add in these costs?

For example: just painting and carpets and a small amount of landscaping; do you add in overages? Or, intensely longer rehab including the above and kitchen, bathrooms, hardwood floor, new roof etc…; before you add in overages?

Yes hard money is normally more expensive here too. I normally put down a good chunk of money and I have a private lender that appreciates that and gives me good terms. Otherwise HM is more like 15-18% with 5-6 points.

Thanks for the comment.

Justin

I think one thing everyone should try to do is get a lower cost for there money. If I start flipping my goal would be to try to get cash as quick as possible. If you have enough cash then in this example you’ve got an extra 10K profit.

The rental cash flow analogy is a great point to bring up.

I know people argue about using OPM, but if you’ve got your own on a flip. That’s what I’d like to do. The important thing is using the actual figures of what it is going to be. If you get private money at a 10% rate with no points use those figures. If your hard money cost are 5 points and 15% use those figures.

Great post.

The cash flow thing is a very good point. I didn’t mention that in this post because I used a high interest hard money loan for my example. It’s tough to get a 12% loan to cash flow so I didn’t want to complicate the scenario with talk of refinancing. But, I always keep that option in the back of my mind in my deals. Thanks for bringing it up. It’s a great point. It’s also good to see how other people are coming up with numbers. I was never taught how to come up with a number. The system I described above is just something I came up with from my experience which may not be fully applicable to people who operate in other geographical locations.

Thanks again.

I like your approach to coming up with an offer price. I use a similar approach by taking 50% and 70% of the after repair value – repairs and all costs to arrive at an offer range.

A 2nd thing I do is always make sure I have multiple exit strategies by doing a quick cash flow calculation. I take 70% of the rent and subtract PITI of my low and high range. 70% because I take off 10% for each of the following: property management, vacancy and maintenance. If it cash flows well and I can get the deal in my offer range then I know it is a home run deal.

Great post!

Good catch. I added the full year taxes instead of the 6 months I had calculated.

Thanks.

That’s exactly right. Thanks for explaining that to Doug. I’m out of the country right now so it’s hard to stay on top of this.

Thanks again.

For those newbies who followed it correctly, it appears that Justin added in the taxes amount twice in step 3.

Finance 6,000.00
Taxes 1,200.00
Insurance 500.00
Utilities 600.00

Total holding costs should be 8,300.00 not 9,500.00

Which would translate into a purchase price of
115,700.00

A hard money lender will usually charge you an up-front fee for borrowing the money, commonly referred to as “points”. In Justin’s example, he accounts for a “4 point” lender charge, equalling $4,000. The other 12% is the interest rate (calculated over a ONE year period) charged by the lender on the loaned $100,000.

In this example, Justin paid back the lender at the end of six months time. Here’s how to figure out how much of the 12% interest you owe after six months:

100,000 multiplied by 12%(or .12) equals $12,000. Remember though, that this is the interest amount due after TWELVE MONTHS. Since the money was paid back in half the time, dividing the $12,000 by 2 will give you a total loan interest charge of $6,000 [If you'd like to do some of your own practice scenarios, figuring out the MONTHLY interest cost figures might be more useful if you use a shorter or longer rehab time period than six months. Use this formula for monthly interest: (Loan amount)x(interest) divided by 12]

Putting it all together, Justin ends up paying $4,000 in points and $6,000 in accrued interest for a total “financing cost” of $10,000