Real Estate Investor · Standish, MI · Member since 2008 · 26 posts · 0 votes
So I basically have seen two basic formulas on these message boards to determine whether or not a property is a good buy.
For rehabbing: (ARV * 70%) - repairs = Max Purchase Price
For Renting: Rent * 50 = Max Purchase Price
I would like to buy a property to Rehab, but be able to fall back and rent it if I can't find a buyer quickly... while also having positive cash flow after mortgage and operating expenses.
If I put an offer on a property for $25k and the ARV is $50k (if I put in all new flooring, paint, and redo the kitchen and both bathrooms) that leaves me $10k (According to the formula) for repairs which I could likely do if I'm doing it all myself.
BUT...
That would have me with $35k into the property, and I am only confident of being able to rent for $600... Which would make this a loser according to the rent * 50 = Max purchase price. I would have $35k in a house according to the formula I should only pay $30k for.
The way I rehab a home for rental would not allow me to put it on the market for sale. If I pay 25K for a home, I figure I need to put less then 3K into the rehab expenses in order to make it rentable. As an example.. I picked up a HUD for 23K, put 6K into it, which was 2k over budget due to unforeseen things (front yard gas line leak and termite extermination) and it's currently rented at $600 per month.
I refi'd 4 months later to pull cash out for another purchase and the appraiser valued the home as an investment property, taking the rental income into consideration. The home appraised at $64K. Now I could never list that home and sell it at 64K. The counter tops are scratched and stained, old painted cubboards, old windows the upstairs bedrooms floors are painted and I have cheap carpet down stairs. The best I could sell it for is perhaps 47K. In order to get a true 64K out of this house, I would have to invest another 10K into it.
The point I am trying to make is that you cannot rehab a 25K home as a rental and expect to flip it in the same condition, by time you get ready to sell it, you are going to have go back in and reinvest more money in it in order to make it marketable. Unless of course you are doing land contract or lease options.
If your numbers are on point this is a deal...to sell. Now you should really have a very good idea of your intention for the property BEFORE you buy the property, unless the deal is so fantastic it works either way.
If 10k makes this home sellable at 60, you're all set. However if you were renting it, you probably wouldn't put 10 into it, as it would be a waste considering the wear and tear of tenants.
Sounds like what you should do is figure out your specific investing goal (sell or rent) and seek properties that specifically meet your criteria for that goal.
What city are you buying houses with those rent ratios? What type of area are they in? My experience with homes in the 25-35k price range is they have great cash flow but not much appreciation potential since they are in very run down areas.