# How low to go with offer

4 Replies

This is my first real estate investment property. I’m looking at a couple of duplex es that is priced at 120k each with tenants only paying 500 a month.

Most people recommend 15% below the list price but these properties have been on the market over 2 years? Can I drop the offer to 20%

Your offer should be based on how much you need to buy the property for in order to make the kind of return you want to make. Let's say you want to make 12% annual return on an all-cash purchase, and the property needs no repair and has 2 tenants paying \$500 per month, and that is market rate (let's keep the scenario simple). Let's also assume you've got \$2k in holding costs annually and no repair, vacancy, or capital expense costs (just taxes and insurance). In that case, you need to own this property for \$98,000. How did I get that number?

\$500 per month x 2 units = \$1000 per month rent, x 12 months = \$12,000 per year rent

\$12,000 annual rent divided by your desired rate of return (12% in this case): 12,000/.12 = \$100,000.

\$100,000 minus your \$2,000 annual holding costs = \$98,000

Obviously, this is a gross simplification that leaves out a lot of factors - can you raise the rent? Is the place a dump that needs a new roof and all new floors? Is the place prone to being 3 months vacant every other year because of the neighborhood? ETC. But you get the idea. The amount the seller wants has no bearing whatsoever on how much money you should offer, if you want the property and are confident in your numbers.

What are your numbers? Projected vacancy rate. Amount of capital expenses (roof, furnace, etc) the place needs. The amount of annual maintenance you'll have to do. How much you'll pay your property manager. Taxes & insurance. ETC. It may be that after you figure all that out, you either have to accept a lower rate of return to offer close to the seller's price, or you have to offer a very low number compared to their price. What you will do depends on how bad you are willing to move your numbers, how bad they are willing to move their numbers, and what the overall market looks like. 12% annual return may be impossible where you live, or it may be a floor of what an investor would expect.

This really helps! Thanks a lot

JD has a good formula . Other methods are using 50% rule and 1% rule . Using the rents to calculate value is great for investors because it takes emotion out of the equation and emotion can make you lose a lot of money .

I think @JD Martin 's method is great.

Another rule that I would keep in mind is if you are not embarrassed by how low your offer is, then you are offering too much.

You could go in and offer \$60,000 if you wanted.  I would be shocked if they accepted it, but maybe they would since they have been on the market so long.  Or at least maybe they will counter to a number that you are comfortable with.

The worst that can happen is that they will outright reject your offer, in which case you can make them a new offer.