So I'm a newbee to BP. I am hoping to buy a rental property. I have seen several that I like. My question is: how much should my offer be? I have an agent helping me and I'm sure he will have recommendation. However, I have to believe there is a way to calculate an offer value however I don't know what it is.
Any help would be appreciated.
If you are buying for profit you want to stay under 70% of (ARV) After Repair value
so if you have a deal for 100k you want to pay no more than 70k for the property fixed up. This way you have room to resell the property and make a profit.
If you're wondering what you should pay for a rental property, I'd say it's too soon to be buying. I would never ask my agent, he/she does not have the same interest as you do. He makes money when you buy, not when you make a great investment.
First, do some study about what it takes to have a profitable rental property. Because when you finally do find something, you're going to have to be able to calculate whether the property will make you money. To do that, you're going to need to know the rent in the area. Then haircut the rent let's say 50% so that you now have an estimate of net operating income (NOI). Then I would compare that with your mortgage payment to see if you have a positive cash flow, and if you do, calculate what percentage profit you will have on the cash necessary to make the investment.
I'd want to look at a bunch of properties in an area. Study the area. Look at the houses on the market (call the listing agent). Get comps for the area. Have your agents print out the sales for the area (that the comps), so you can see what things are selling for. Go look at the sold properties, eventhough you can't see the inside, try to figure out why they sold for what they sold for. Look at the terms of sale.
Go look at some rentals, see what the rents are for properties in the area.
In other words, you study the market, you look at alot of property. You drive by the sold properties to see what they looked. After you have put this time in, you'll know what properties are worth. That's the first step in knowing whether something is a good deal.
What should you offer? If you're truly looking for a rental property, I don't think 70% is going to be the number. Chances are you won't buy anything out of the MLS. Either way, the only shot you would have would be to buy a major rehab. I don't think I would recommend a newbie start with a major rehab. And at that, if you're holding a property for a long period, that discount becomes less important because it is amortized over a period of years. You're not buying to sell, you're buying to rent.
If it were me, and I'm looking for my first rental, I'm going to figure out all my costs to buy the property, and then I'm going to figure out all my costs to sell the property....everything. Then I'm going to figure out what it costs me to fix up the property. Once I have all those costs, I'm going to try to buy at a discount when I have taken everything into account. There's an old saying "you make your profit going into the deal". You're going to have to buy at a big enough discount in order to make money when/if you sell. And as I said above, I'm going to figure out what my cash flow is, because after it's all said and done, I'm not going to buy anything to hold unless it will be profitable to hold.
Go do some study. And then start looking...you've got some work to do. When you've finished, then you start making offers.
The 70% formula mentioned previously is actually a rule of thumb for determining the viability of a deal for flipping and is (ARV * 70%) - Rehab cost = Suggested Offer Price.
The formula for buy & hold is much different, and there are several. Which rule of thumb you use depends on what your goals are. @Jim Piper is exactly correct. You really need to get a little more education under your belt, before you begin risking your money. I'd recommend you start by reading the free Ultimate Beginner's Guide, which you can find at the link below. Also, start listening to the podcasts. They are pure gold.
Hi Hattie - Looking at Buy and Holding something. Was trying to use the 70% ARV rule but I felt like I was willing to pay more for the house because - I would owner occupy duplex and rent part. Which would be a couple rules to use? 1% rule? or?
It really depends on what your goal is. Those ratios are just some general guidelines. If your goal is to have your properties cash flow at least $200/mo, then it really doesn't matter what ratio they hit, as long as they hit your cash flow targets. I recommend simply using the BP rental analysis tool. That will give you a good, solid picture across all the areas of evaluation and allow you to determine what will work for you. The calculator is here...
Hopefully this reply goes back to everyone who has posted today. Again, as a newbee to BP I don't know a lot about how it works.
Thanks for the feedback about my request. There was a lot of good advice in what was said. I need to do more homework and I will. However, I'll probably be back with dumb questions so please bear with me.
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