What's your favorite "formula" when finding a deal?

Question

In my research I've come across several different formulas people use to determine if a deal is worth the risk. The 70% rule [i]seems to be the most used and discussed (?).

While at a workshop recently I met someone who uses this formula:

Figure out ARV.

Deduct 10% of ARV for rehab costs.

Deduct 8% of ARV for all closing costs (including hard money).

Deduct 15% of ARV, which is your target profit.

You're then left with the purchase price.

Does this look good to anyone? Regardless, I'd love to know what formulas work the best for you.

J Scott · Answer

That formula works perfectly for projects where the rehab costs are $7-10 per square foot...  :)

Seriously though, there is no "average" rehab cost.  Every project will be different.  I rarely find properties that need less than $12-15/sf in rehab, but I occasionally will find one that is rent ready and doesn't need any rehab.

Learn how to estimate rehab costs...don't use these rules of thumb...

Account Closed · Answer

J  Scott - Bought your books last night and got about 40 pages in to the Flipping Houses one. Love it so far!

Steve Babiak · Answer

Maybe the person advocating this approach only does "lipstick" rehabs :)

If not, then anything structural will blow his budget.

Tim G. · Answer

#1 Rule. Know your market, better than anyone.

DuRon Netsell · Answer

Ben,
  I would think it would be hard to use 10% for rehab costs as a rule of thumb because properties will be in a different kinds of shape. Some may need major structural repairs, while others may just need paint and cleaning.

Also, I don't see where that formula factors in holding costs?

Steve Wilcox · Answer

There is no formula that is that simple

You need to know your rehab costs they could be 10,000 or 110,000 depending on the condition of the home and how nice it needs to be when completed. 
Also holding costs vary based on markets as well as the time it will take to rehab. Paint and carpet don't take as long as additions, total gut, new major systems, ect.

I don't think you can assign a real formula, because for every deal there needs to be some flexabliity and some deals will need to have more profit to offset opportunity costs

Some examples- A SFH working right now that needs new heat system, new kitchen and baths requiring a total out of pocket of 50-60K after down payment, finance costs, carrying costs, ect might be worth while for a 30-40k profit

However a major addition, new heat system, new electric system, add a half bath on existing main level, and otherwise total gut requiring 100K out of pocket might not be worth doing.

My formulas are based around a certain ROI i want to achieve from my capital, as well as a certain ROI on my time spent managing the job. More difficult jobs are typically more expensive and require more of my time so thus require a higher profit.

Many new investors do not place a value on their time and the stress a rehab can put you under

Joshua Brown · Answer

Anybody use the square footage x $7-$10 range for estimating updating/repair cost?

Example:

1500sqft x $7=  $10,500 update/minor repairs
1500sqft x $10= $15,000 more extensive updating/more extensive repairs

I know that it doesn't work on every deal. And some repairs might need a higher cost maybe (sqft x $12-$15)

Jamaal Hunt · Answer

Right now for cash flow. I place a focus on the expenses I have to pay per month to be included in the offer. If there are any repairs I include that too.

Justin Silverio · Answer

Here's a better approach:

1. Identify ARV
2. Subtract what you will actually pay for purchasing, holding and selling costs
3. Subtract your profit
4. Subtract your rehab budget for that specific property
Result is your MAO

For step 2 - separate these costs into fixed costs (i.e., attorney fees, utility fees, etc.) and variable costs (i.e., RE agent commission, title insurance, property taxes, etc.). Your variable costs will be mainly attributable to your ARV.  For instance, RE agent commissions are usually 5-6% of your ARV.  Once you have these costs broken down, you can create your own quick calc.

For instance, if I was to purchase a property, my calculation would look like this:

ARV x 5.05988889% (variable costs) - 9,000 (fixed costs) - profit - rehab cost = MAO

This way is more time intensive up front but you will have very accurate numbers.

Mike H. · Answer

I'm also a buy and hold only investor. So ARV means a lot less to me although it is still very important because I need to know that I will be able to refi my hard/private money rehab loan into a perm loan after I'm done.

My formula is very simple:
1) LTV has to be 70% or better.
2) If I were to buy a house and put no money down and then refi it, my profit before vacancies/repairs has to be $400 or more - after I get my permanent financing. Although I sometimes make an exception and will go down to 350 and even 300/mo.  But anything less than that is an absolute no.

So if I purchase a house for 65k, put in 13k in rehab and pay 8k in financing fees, I'd be all in at 85k (deal I did recently). If my perm loan is going to be 4.75% amort over 30, my payments would be roughly $450/mo. My taxes and insurance another $450/mo and my rent $1,450.

That would leave me with a spread of $550 a month - again thats before vacancies and repairs.  But I'm comfortable that with a 93% occupancy average, I will still come out ahead at $550 a month on the cash flow.

$350 might be a little on the low end so depending on the house type (built in 90's yes, built in 50's no), the equity capture, etc, I might pass on $350 or I might say yes to $350.

But I just think that a buy and hold investor needs to be most concerned with cash flow and this should give you a solid way to compare apples to apples.

Here's one example of a deal I just closed on two months ago that isn't really a great house but it is a great cash flow house.
3/2 ,1450 sq ft but a much older home (50's).  NO garage!  It didn't need much work and I was able to get it for 34k. I'm just wrapping up rehab now and should be all in at 13k for the rehab (about 3k over my budget because the hvac had to completely replaced instead of 1k for repairs).

Since I was paying cash (and then refinancing to commercial later), there were no financing fees. I was all in at 47k.  At 50k, my payments would roughly be $250 a month, taxes and insurance another $200/month.  That left me with a profit before vacancy/repair of $475 a month.  Not a great house for appreciation (its only worth about 75 to 80k) but it just seemed like such a good deal and its in a nice area thats close to home so I did it.

Its a great little house. Rehab just wrapping up now and its  rented before it was even finished.  I didn't do no money down on this one because I paid cash. Ended up out of pocket about 14k. My loan is 33k and my payments are 220/mo. So I'm right at $500 a month before vacancy/repairs.

If I could put 20 of those together, I'd be incredibly happy. Although I'd prefer the better product where I'm all in around 80 to 90k, they're worth between 135 to 150k as those have some real nice appreciation potential as well.

What's your favorite "formula" when finding a deal?

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