Hi Cynthia,
I think that I can best answer your questions by showing you a project that I am currently working on.
I recently purchased a 3br/2ba in a pretty nice neighborhood in Portland for $304,075. We got a good deal on this property, other bidders had offered $330,000.
We put our offer in originally at $311,000 with $5,000 of concessions, but we had an escalator clause (saying we'd pay $1000 more than anyone else, this generally works for us, if it gets crazy we can always back out during the inspection period, but I've never done that) which was accepted. This put our starting number at $336,000 or net $331,000.
We then deducted my realtor commission of $8400 and then after the inspection period, we negotiated a $18625 seller concession due to the condition of the home.
We purchased the home in "cash" (we used the credit lines that I've created with equity from our portfolio). Here it is.
https://www.zillow.com/homedetails/6636-SW-32nd-Av...
One side of it is on a semi-busy street, a buyer would be very concerned with this, but an appraiser would not (because they operate by using a computer that pulls comps to make their job easy). This is a very very big deal, because it allows you to get a much higher after rehab appraisal value vs purchase price, than if you bought a house in the best neighborhood.
We plan to do about a $100,000 rehab and add about 550 sqft ( (enclose RV carport, and enclose deck on the north side and build a new deck, as well as remodel the whole house).
Once the house is done we expect the appraisal to come in at $500,000 or $550,000. I am trying to get my wife to move into this house with me so we can do an 80% LTV 30y fixed loan with a low interest rate, but otherwise I'd do a 30y fixed 75% LTV investment loan.
If it comes in at $550k and we get the 80% loan then we'd get 110% of our capital back. If it comes in at $500k and we do the 75% LTV we'd get 93.75% of capital back. The home would likely sell somewhere around $450k or $475k so it wouldn't be a good flip because there's just way too much risk there, but since we are not planning on selling the house it's a single or a double for us.
I don't really use an equation... I always look for opportunities to add sqft and to create value that would be convincing and seen as valuable by an appraiser.
This is a very typical deal for us, we've done about 30 of these buying most of our homes on busy streets or near the highway or with bad parking. They make very good rentals, but are more difficult to sell.
Hope that answers your questions.