Thank you both tons for the response.
Troy, I have 3 quick follow up questions, if you wouldn't mind:
1. In the examples you offer, Im unclear as to why my ARV would be so low. For example, if Im purchasing for 80k, rehabbing for another 80k, and the ARV is 240, then, even assuming I sold it under market value, wouldn't it be more than 24k? Ideally it would be 80k ROI, but even half of that would yield more than 24, Same for the example with the 40k purchase, 40k rehab and ARV of 120k which would leave a 40k net in value. Or do you mean 10% using it as a rental prop? I know this is my lack of understanding, so I'm trying to understand better.
Sounds like you have a few terms confused. ARV is After Repaired Value or what the house should be worth (what a buyer would pay) when you're all done fixing it up. Sounds like you're confusing profit with ARV? Profit is the $12k or $24k I came up with in my earlier examples. Don't forget you get to pay taxes on that at the end of the year too :)
In Philadelphia we pay (traditionally, it's all negotiable) half the transfer tax when we buy and half when we sell. TT in Philadelphia is 4% of sale price so we pay 2% when we buy and 2% when we sell. 6% to a realtor on the back end, closing costs on the buy and sell side, holding costs (debt service, taxes, utilities, insurance), and we haven't touched the house yet. You lose 10% of sale price (or more) to all this fun stuff and possibly more depending on your cost of money. If you're using the 70% rule, which will get you close (it's not enough on cheap properties and can have you miss out on more expensive properties), that leaves 20%. 10% for profit and 10% for mistakes/changes/delays, of which you'll have plenty. As I was saying earlier, that 10% cushion goes away quickly on a cheapo house. This is how the 70% rule is a great way to get yourself in BIG trouble on a cheap house. You really need to analyze these deals with a spreadsheet or calculator that takes all these costs into account. Rules of thumb like this are great for a quick once over but if you invest solely using this rule there's plenty of ways to get yourself in trouble.
2. Wouldn't termites show up when you have the property assessed before purchase? I have read that termites are one of the worst issues to deal with, so how do I avoid buying such a property? Do I need specific pest control checks beforehand? I would imagine professionals assessing a property would be trained in identifying termites given the impact an infestation has on value.
In my area there are shed kitchens that are basically additions off the back of the house. Half the time these are built on dirt with no crawl or access underneath. If the inspector can't see it, he can't inspect it, and won't do anything invasive to get to it. So let's say you have some termite damage in the rim joists and floor joists in the shed kitchen. At least, you'll be demoing and replacing the floors, joists, sills, etc. there. Let's say the little buggers got to some framing in the dining room on an exterior wall, adjacent to the shed kitchen, that was covered by drywall. You open up a little drywall and now you're on the hook for repairing the framing, insulating, drywall, trim and paint in an area you hadn't planned on touching. I'm not trying to scare you but I am trying to show you how $h*t goes down hill quickly, especially with a small cushion for error :)