Current new investor with a few properties looking to create a solid criteria that would be fast and efficient when evaluating a new deal whether flip or hold. Can any experience investors give some insight into the most important mathematical formulas need to evaluate a deal for profitability? To be more specific would we be able to create a list of the, let’s say 10 essential formulas need to properly assess an investment property?
Welcome to the world of REI! Although some of what you ask will depend on your investment goals (buy and hold, or flipping, Buy Rehab Rent Refi, etc) there are some general rules of thumb that could help make your screening of the numbers more efficient.
Since I attempt to buy and hold through the BRRRR method, I do lean heavily on finding the After Repair Value (ARV) through trusted comparable sales I get from a trusted real estate agent or I located myself of the MLS (multiple listing services). I take the ARV and multiply it by 70%. The 70% is the standard amount most financial institution will loan to an asset. Then I take the calculated holding cost (insurance, taxes, utilities, etc), rehab cost, and transaction cost (closing cost, sales commission on flips, etc) and subtract from the ARV x .70 number. This gives me my MAO or maximum allowable offer. Then I play from there.
(ARV x .70) - fixing cost (holding, rehab, transaction) = Maximum Allowable Offer.
Frank Gallinelli's What Every Real Estate Investor Needs to Know About Cash Flow...And 36 Other Key Financial Measures is a great resource for residential and commercial property investment metrics.
I have also found the BP's books to be essential to my ongoing education.
Good luck with everything and let me know if I can clear up anything! I love connecting with people and discussing and learning about REI!
I'm just going to ignore the cost of the actual flip its an obvious calculation you need and if your flipping you should already have that one covered.
1) How ARV is calculated in your area.
This ones obvious but unfortunately a lot of people don't learn and it burns them. Also, its calculated differently in different areas I would contact an appraiser and find out how its done in your area.
2) Holding costs those insidious costs that will rack up just for the "privilege" of flipping a home. They can sink you because you don't make money until you sell. Some of the major ones are:
marketing (when you go to sell)
heat (if not electric)
3)The 70% rule
4) If a property is over 1000 sqft. it can likely fit at least three bedrooms (thank you Brandon Turner. This allows you to look at properties that others may pass up.
I hope some of these help and best of luck!
Welcome to BP, Clayton. I always factor my expected profit in my calculations. It's like an expense. Say, for example, I need to make at least $25,000 per flip. If the numbers don't work with that profit factored in, I keep looking for better deals. As a flipper, you're taking on risk and need to be compensated for that, in addition to earning a payoff that makes it worth the time, effort and expertise you put into taking a distressed property and turning it into a home.
And don't forget to factor in your selling costs when you flip properties...as a rough number in my area for starter homes, that's about 8% of ARV allowing for agent commissions, closing costs, potential seller help to first time homebuyer, etc. Hope this helps.
@Courtney Rollins -thanks for the reply Courtney, the BP resources are real assets to education. I will follow up with Franks book also. Would u recommend any good methods to evaluate an investment area? Like how I could verify market stats regarding resent home sales if mls access in the area is limited ? Example if I’m researching markets in areas I’m unfamiliar with what’s the best way to get accurate stats on history?
Originally posted by @Clayton Howard :
@Courtney Rollins-thanks for the reply Courtney, the BP resources are real assets to education. I will follow up with Franks book also. Would u recommend any good methods to evaluate an investment area? Like how I could verify market stats regarding resent home sales if mls access in the area is limited ? Example if I’m researching markets in areas I’m unfamiliar with what’s the best way to get accurate stats on history?
Hi @clayton howard sorry for the delay. Sometimes zillow, trulia, and redfin have accurate past home sale prices. You have to adjust the filters for recent sales and put in your criteria, etc. you may want to establish a relationship with a few agents who have MLS access, be kind with their time and ask for specific list. For instance, depending on your strategy you could look up recent cash sales in an area to see how active it is. I've also heard that you can look up the current amount of sales in an area, then find out how many properties were closed on in the past month. When you divide these numbers it gives you an idea of the average time a property will sit on the market in a particular area.
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