Fairfield, CA · Member since 2018 · 105 posts · 16 votes
Hey BP Family!
Question when an investor/buyer wants buy and hold properties, NOT properties to flip, am i still treating it the same as when i wholesale a buy and flip deal? Meaning, ARV * 70%, calculating repairs, etc. Or how would i go about finding those type deals. Because we all know, lots of the mls listings, the owners want as close to asking price as possible.
Lender · Playa del Carmen, México · Member since 2014 · 2k+ posts · 1k+ votes
8y
Hi @Kevin Powell. A buy-and-hold investor (i.e. a landlord) looks at deals very differently than a fix-and-flipper. For flippers, the MAO Formula (70% * ARV minus Repairs) is the standard. In contrast, most landlords I know focus on the rate-of-return produced by the property: I'm personally a big fan of cash-on-cash return (COCR), which is just "total cash received" divided by "total cash invested" for the first year.
So, when I look at any potential wholesale (cash) buy-and-hold deal, I first estimate what my landlord/buyer will receive in annual net income (rents minus expenses, which include management fees, property taxes, insurance, maintenance, and vacancy loss). Then I calculate the cash the landlord/buyer will need to obtain and repair the property: purchase price, closing costs, my wholesale fee, repairs. When I divide "cash in" by "cash out" I'm looking for a COCR of at least 10%. That's the least most landlords in my market would accept.
If I can't offer my landlord/buyer at least 10% COCR, then I've either got to reduce my purchase price to the seller or lower my wholesale fee. Otherwise, I don't have a viable buy-and-hold deal.
Lender · Playa del Carmen, México · Member since 2014 · 2k+ posts · 1k+ votes
8y
Hi @Kevin Powell. A buy-and-hold investor (i.e. a landlord) looks at deals very differently than a fix-and-flipper. For flippers, the MAO Formula (70% * ARV minus Repairs) is the standard. In contrast, most landlords I know focus on the rate-of-return produced by the property: I'm personally a big fan of cash-on-cash return (COCR), which is just "total cash received" divided by "total cash invested" for the first year.
So, when I look at any potential wholesale (cash) buy-and-hold deal, I first estimate what my landlord/buyer will receive in annual net income (rents minus expenses, which include management fees, property taxes, insurance, maintenance, and vacancy loss). Then I calculate the cash the landlord/buyer will need to obtain and repair the property: purchase price, closing costs, my wholesale fee, repairs. When I divide "cash in" by "cash out" I'm looking for a COCR of at least 10%. That's the least most landlords in my market would accept.
If I can't offer my landlord/buyer at least 10% COCR, then I've either got to reduce my purchase price to the seller or lower my wholesale fee. Otherwise, I don't have a viable buy-and-hold deal.
Fairfield, CA · Member since 2018 · 105 posts · 16 votes
8y
@Mitch Messer wow this was very helpful man i thank you a lot. I have a buyer who wants buy and holds/rentals. This helps me quite a bit. @Michael Kirkwood take a look
Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
8y
@Kevin Powell, just to tag on the great advice you got from @Mitch Messer above- buy your buyer lunch and get specific. Ask him exactly what his buying criteria is, understand why, and go shopping for it. I'd do this for every buyer I work with, regardless of what they do with the property. Good luck!
Property Manager · Indianapolis, IN · Member since 2010 · 1k+ posts · 1k+ votes
8y
It has to be worth that too. Lots of bad areas have homes on the mls much cheaper than 10% cash on cash. So a house you may value at 80 could be bought off the mls for 45k.
(I don’t buy less than 15%) so double checks actually value.
Rental Property Investor · Folsom, CA · Member since 2016 · 140 posts · 70 votes
8y
As a buy-and-hold, I'll do the math to calculate cash-on-cash return, and that's a primary factor. But, 10% CoC buying something in good condition off MLS is not the same as 10% CoC buying a dump wholesale and fixing it up myself. For one, there's going to be the cost of an extended vacancy and/or making it vacant to get the work done. This is hard to factor into a CoC return because it can be so variable.
Also, as a buyer, I'll expect to have some return for the risk and effort I take on by doing the rehab. I'm not going to jump on a property selling at a $25k discount when it needs $25k of work. Basically, when buying a fix-and-hold, I'll expect it to look like a flip and a rental in one. I might accept less profit than a flip would typically create, but will want some financial motivation to do that rehab.