how to wholesale cash flow rental properties, doing the math.

8 Replies

Does anyone know how to evaluate a cashflow rental property before trying to wholesale? I am talking to a lady about two cashflow properties that she wants to sell, so she can move up to a larger multi-family! she and I have talked about my interest and she understands that I am a wholesaler. I am trying to crunch the numbers to find out what would be a good offer. I've been looking for a ROI for cashflow rentals and what would make a great offer to the seller, as well as add my assignment fee. If anyone can shed some light on this subject, it would be greatly appreciated!

Hi @Christopher Courter ,

Great that  you have a deal in the works. I would recommend using the Rental Property Calculator that BP offers. I think you get 5 free analysis if your not a Pro member. The beauty of it is that you can run your numbers and keep adjusting them until you know exactly how much you can pay for the property. Let me know if you need any help with it, theres also some videos on how to use the calculator. Have a bless day.

Joaquin Rosario, Real Estate Agent in New York (#10401307677)

@joaquin Rosario,

I've tried using the calculator that is on BP and Im not sure If I am using it correctly. Right now I have what the asking price is, what the yearly income is and the taxes on the property. I just want to be sure that is enough information i need to use the calculator!   

I never like it when people don't account for turn over and maintenance in the ROI. I have looked at many properties where the seller says its a 25% ROI and its really a 9% because they don't account that stuff.

In your situation... I would be the guy who buys it from you. I would put in those number and call your bluff and offer you less then you were expecting. I purchase based on those numbers and not what someone says the house is worth. I care little about appraisal values and focus on the ROI of every property I buy.

Thats a great tip! Thats basically what I did. I made sure to do my diligence on these two properties and The calculator worked out great!! I asked for a lot of information about the property and she was very cooperative! Once every thing calculated, everything made sense! with my comps and the spread sheets from the calculator I was able to make a confidant offer!!

@Christopher Courter

If the properties are 4 units or less, don't worry about the operating data.  That's your end buyer's problem.  Just use comparables like an appraiser would for this type of property.

As a beginning wholesaler, you need to focus on discount from fair market value (after repairs).  Like @Gordon French pointed out, as secondary buyers, we will run our own numbers with our own management if we are keeping them.  Your numbers don't mean very much at all.  All we care about is are we getting the property at a deep enough discount that we can make money.  

But what does matter is the discount.   If similar properties in similar condition are selling for $250K, say, I'm interested in the property at $150K but not $225K.  I don't care what the current owner is getting for rent or what she's netting or what you think the property should do.  I'm not hiring her (or you) as my manager.  

The generally accepted rule is to wholesale the properties for 70% of Fair Market Value (FMV) less the cost of repairs. In other words, if a fixed up property would retail for $200K and the property you found needs $30K in repairs to get there, you need to be selling it for $110K  (0.7x$200K-$30K).   Any other analysis you do presumes you understand how much investors are willing to pay for certain cash flows in your market (cap rates), that your analysis accurately represents that, and that your end buyers don't know or understand these things--which is not really wholesaling then, is it?

Once you get it under contract, to market it, present your estimate of FMV, market rents, and repairs needed. That's the information buyers will need to see to determine if it fits their criteria.

That being said, if you do get her under contract, make sure you get as much of her paperwork as possible (leases, operating data, etc) because your buyers are definitely going to want to all that information.

 @William Hochstedler undefined

Ok that makes perfect sense, I see now why my comparables where at $250K for the 6-unit. 

So here is where I am now. I just emailed her a Purchase Agreement last night for both of the places that she is selling. The duplex, the numbers work just fine, I did the math as if I was contracting a Rehab. so my offer was pretty good for that one. The 6-unit complex, I am to high for my offer. So my question is... How do I re-negotiate an asking price for the 6-unit complex?

  

@Christopher Courter

Ooops.  Six units are evaluated based on income although comps will help get your bearings.

If you've got it under contract, shop it.  Then go back to the seller with the feedback you get.  Figure out at what price your buyers are a "yes" and present that number to the seller. 

Good luck!

thanks for the advice!! I have been looking for a different perspective than my own. Just to see what I may have been missing with these deals. the duplex I'm pretty confident with my numbers, it was the 6-unit that I was slightly doubting!

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