Need input

4 Replies

Hi everyone. I'm very new to real estate investing. Actually working on finding my first deal. I generally stay on the side of caution when it comes to evaluating anything, but I'm wondering if I'm over evaluating at this point. I've kind of come up with a formula to try and go by, but a deal I thought was good, after I ran all the numbers, doesn't seem so great, but I'm not sure how a .60 on the $1 isn't a great deal after the math is done. So here's what I have. 

The deal I'm looking at is a 2B/2B, 1088 sqft. Its current assessed value is 59k as a 2B/1B... the second bath is not currently permitted. Contractor said it shouldn't be a problem. The owner was asking 43k but we got him to settle on $38,700. He pays closing and back taxes due. ARV is estimated from $79k(worst case)-$89k...

This is the formula I came up with. Please let me know if I'm missing anything..

        ARV (79,900)

  • -Purchase price ($38,700)
  • -Acquisition cost (Earnest ($500), Inspection($500?), lender points(4=$2148. Includes rehab $)/fees($500)
  • -Rehab cost (15k)
  • -Carrying cost (6 months)(Utilities(450/month), monthly payments($626/month. 14% interest rate), insurance($75/month?), gap lender payments($500/month?)
  • -Selling cost (6% for Agent, 4% for Title/escrow/home warranty/closing cost/termite)(10% total) ($7,990 total)
  • = Profit ($4,656)

This is based off of having the loans and property for 6 months from bought to sold. I do my math with ARV as worse case ARV in case I get my first house doesn't sell as fast as I hope. Some things like Inspection and insurance and gap lender payments are pure guesses as I've never done any of those things so not sure of the cost yet. $4,656 profit just doesn't seem like a good ROI when you think of all the risks or a problem that requires more $$$ or I may have forgot about something in the initial equation. It seemed like a good deal at first. Ive heard the general rule is ARV - 70% - cost of repairs = offer. If this was the case the offer would be $40,930, but our agreement is even better than that and still the profit margin just doesn't seem good enough? I don't know. Any input from experienced investors is welcomed. Thank you

To me personally, I would not deal with a property for 6 months for under a $5000 profit!!!

This is too thin. I wouldn't do it.

Utilitites are $450 a month?  No way.

What's the $500 a month to the "gap lender"? Looks like you're using a HML who's funding most of the deal. Are you borrowing for all the other costs? How does that result in a $500 a month payment?

These two numbers seem very large.   

4% for closing costs on the back end is very high.  For one, when the original title policy is purchased when you buy, have the title company do a "hold open".  Then, when you sell, use the same company and have them update the policy.  That will significantly reduce the costs of the new policy. 

Are seller concessions required in your area?

Not sure why you would pay for an inspection if you have a GC working on this project with you.

Thank you for the replies everyone. 

Jon: I did estimate bills on the high end. With the construction going on I wasn't sure how much electric tools and things would pull. If I had to take a more realistic guess, I would assume $200-300... I'm just afraid to underestimate something and not have enough cash stuck back to fund everything during the process. That's why I asked if maybe I'm over evaluating things though. $500 is an upfront fee with many fending as a "processing fee" or things like that. I also saw quiet a few that required an inspection and/or appraisal to get a loan... So I was factoring in some of those misc cost and requirements from lenders. I don't really have any money to start so my plan is to take out a personal loan as the "gap" money and roll profits till eventually I wont have to do that. The lenders I'm taking to will only fund about 80% of the cost of home purchase and reno. So I would have to take out a decent sized personal loan to cover everything else, which would require a monthly payment and interest on that loan.. Its looking very expensive to have two loans out on deal, but its really my only option at this point.

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