Are you moving to the 80% rule?

Question

Just want to get a feel for what other investors in the metro are see in the market. Most of the deals I analyze, I use the 70% rule as a starting point. Are you still using 70% or are you moving up to 75-80% to be able to access a larger pool of properties. This is based on Single Families in st.paul/minneapolis area.

Jeff S. · Answer

You should really learn to evaluate all the expenses and run the numbers, Cha Yang.  You'll find that for properties with an ARV less than about $250k, you will barely break even at a cost that's 80% of the ARV minus repairs.  This assumes you are using hard/private money and paying commissions to an agent.

To a person, the experienced rehabbers we know who can't find a decent deal, will just sit on their money until they find a viable property.  I suggest you take a lesson from them.  Never think that this time it's different or that somehow the numbers don't apply to you.  Anyone can make a bad deal.

Matthew Berry · Answer

If those are the numbers you're seeing from wholesalers, I would question how experienced they actually are.

They could be new to wholesaling, just bought a package from a guru, and trying to market every seller regardless of how good the deal is.

Jay Hinrichs · Answer

@Jeff S.  I see folks miss this all the time..  although if you can move in an out really really quick that can mitigate.

when I ran my HML in PDX  the guys I saw pay the most were the smaller rehab contractors who were basically buying a job.. they figured if they could make wages plus a profit.. they would take on skinnier deals.... those deals would not work for an investor who does not strap on a tool belt.

Matthew Paul · Answer

No , I am not losing a dime to inflation . real estate investing is only a portion of my portfolio . I have many baskets to keep my eggs in.

The wholesales have a tendency to under state the repairs , making a house in the 75% to 80% range really a house in the 80 to 90 per cent range .  Too thin for me

Jordan Archer · Answer

Cha Yang

If your buyers are buying at 80%, then yes. Every wholesale I did in Port Saint Lucie, FL would sell as long as I locked it up at 80%, because the competition was so tight. However, if your buyers are only paying 60%, then that's your numbers. KNOW WHAT YOUR CUSTOMER WANTS!

- Jordan

Matthew Berry · Answer

Cha Yang are you looking at the MLS for finding properties? If so, you'll be hard pressed to find a listed deal making offers based on the 70% rule. There are a few larger rehab companies in the area who can afford to flip homes at a lower margin that your typical one-man rehabber/investor.

For speaking with motivated seller off the MLS, I think 70% of ARC minus repairs is the best rule of thumb.

Cha Yang · Answer

@Jordan Redar I totally agree. I'm just wondering if other rehab investors are starting to buy at 70%+ in my area (twincities) since I am starting to see those numbers from wholesalers.

Cha Yang · Answer

@Matthew Paul for that money that you have allocated to real estate investing, aren't you actually losing 2% a year to inflation. What do you do to keep the money you have accumulated, moving?

Back on the subject, the reason I ask is because I am starting to see a lot of different wholesalers send me deals where the numbers are creeping up to the 75%-80% range.

Matthew Paul · Answer

Well ,if you adjust your numbers and dont make any profit , sitting on your money is a smart move .  I havent found a deal in 2 years . No big deal , I havent lost a dime . Have enough work contracting , and its better margins .

Cha Yang · Answer

Thanks for the reply guys!

@Matthew Berry all of the deals we work on are off MLS.

@Jeff S. the 70% rule is just a rule of thumb. We only use it as a starting point as stated in my original post. Every possibly good deal does go through our due diligence process. The second part of your post intrigues me. Are you suggesting that you should never adjust your numbers, even to compete in a competitive market?

Are you moving to the 80% rule?

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