Return on Investment (ROI) vs. MAO

14 Replies

I have a real estate wholesaling coach that tells me that ROI return on investment is most important when gauging what price our buyers would buy at. The formula is

The Rent x 12years x .65 Divided by the ALL IN amount (that includes repairs).

If you come out with over a 20% return, then he says we're at a decent area to sell to those wanting to rent out the house. This seems very different than all the real estate books and information I've read about the MAO formula. Why is that so?

In St. Louis Missouri, it seems that there are a lot of people buying rental property over fixing and flipping. It seems like there are many investors that don't even accept houses with a good return, they want steals with a 30 or 40% ROI! Can anyone explain to me why my coach is doing ROI vs MAO? He seems to not even explain why he does MAO at all.

Hi Curtis,

Not sure what MAO is and how it is used but here's what my most recent purchase would look like with that formula:

$1,000x144=144,000

$144,000*.65=93,600

$93,600/60,000=1.56 or 56%

Hope this helps. For what it's worth, I calculate my maximum price (all-in) by dividing the median rent for the area by 0.017 (59 rent multiplier, in other words). That seems to be about market for what product I'm going for right now, and allows me to still make my numbers. Higher is always better of course.

What is .017 and what is the 59 rent multiplyer? lol.

MAO is Maximum allowable offer. That formula is .65 x After repair value - repairs and/or wholesaling fee.

What is MAO?

I thought more investors would be initiated to the MAO formula. Again: http://thebaltimoreinvestor.wordpress.com/2008/05/28/the-maximum-allowable-offer-formula-mao/

i dontknow what MAO is but ROI isnt necessarily the most important thing

if i spend a dollar and get 2 dollars in return thats 100% ROI but useless

@Derek LeBlanc- That is not the ROI formula that i displayed above. A 20% ROI would have someone recouping all their investment within 5 years. Your mental math isn't as useless as you think.

@Curtis Daniels , it's all a big algebra equation. It sounds like your coach has success focusing on wholesaling to landlords. Nothing wrong with that. He's not calculating ROI, he's using a reasonable ROI in the equation to solve for the "all in" amount.

You need to figure out what a landlord you're hoping to wholesale to would consider an acceptable ROI and find properties that fit that. The same way you would need to ask a flipper what an acceptable profit would be for them.

So, if you use that 20% ROI number and say you find a property that should rent for $1000/month. The gross annual rent is $12K and the .65 is supposed to approximate that 35% of rent goes to expenses and the remaining 65% (in this case $7800) is the NOI. If your buyer demands 20% return, that means the all in price can't be more than $39K. That could be a rent-ready house for $39K purchase, a $10K shack with $29K of renovations or any other combination.

You are probably not on the same page with your potential investors if they are demanding 40% returns on cash purchases. Certainly with leverage and not including all expenses you might be able to see that type of return, but I don't see it happening with realistic projections for expenses and all cash purchase. If you find it, though, let me know.

And I have to disagree with @Account Closed : ROI is a very important thing. In fact, I would say it IS the most important thing. It's how you compare different investments to know which to pursue. If I have 2 potential deals, one would result in $100 cashflow per month and the other $300 cashflow per month, which should I do? Well, maybe the first property was offered on seller financing with only $7500 down but the second one requires $30K down for conventional financing. So, I get a higher ROI on the first one even though the dollar amount is less.

There are many properties that at retail price (based on actual sold comps) will generate over a 20% CoCr with a 20% down payment.... The only way I'm buying from a wholesaler is if they can bring me a property at a discount that is actually below market value (all-in).

In other words, the ROI is something the investor should be setting as criteria for themselves when evaluating potential deals. But, as a wholesaler you should be focusing on getting deals under contract at a steep enough discount that you can wholesale it to an investor well below the ARV.

the reason why ROI is the standard (not only in talk estate but in most business deals) is because a person wants to know what they are getting for their money invested.

The maximum allowable offer only takes into consideration the amount of discount. I can buy properties using MAO all day long but if I have no one to buy it at a higher price then I'm kicking my own butt.

I'm not saying using different financial formulas isn't good for determining your risk and return. I am saying if you're using a different measurement than what your investors are using or your brokers then you may run into some trouble because you're not on the same page..

Originally posted by @Mehran K. :
There are many properties that at retail price (based on actual sold comps) will generate over a 20% CoCr with a 20% down payment.... The only way I'm buying from a wholesaler is if they can bring me a property at a discount that is actually below market value (all-in).

In other words, the ROI is something the investor should be setting as criteria for themselves when evaluating potential deals. But, as a wholesaler you should be focusing on getting deals under contract at a steep enough discount that you can wholesale it to an investor well below the ARV.

Agreed with the caveat that I think your first paragraph is saying that the OP shouldn't think a 20% ROI is that good of a deal (for a wholesaler to find) but the way he was describing ROI in the first post looks to be return based on all cash purchase. So, if someone find a property that, all-in, would give net 20% ROI based on an all cash purchase, then you might be very interested in it because the leverage would significantly increase that return.

@Brett Russell - Maybe, just maybe your real estate market is different than mine, because there are plenty of investors that buy at 50% ROI. I'll give you an example of what investors wanted in a property I was selling in the Jennings area of the Metropolitan area of St. Louis.

People wanted 4k-5k for a 3 bed 1.5 bath. It needed at least 12K in repairs. It would rent out for 750 at best. That's right at 34%. That's just one example of a house sold at that rate and hardly considered a deal because of all the repairs needed to be done to it. Landlords are looking for steals in the area I'm from I'm guessing.

Another instance a guy called me up and asked me what I would pay for his nearly pristine 4 bed room 2000 sqft house he was selling on the MLS for $104,000. I told my coach what GENERAL area it was located in and he told me to ask the seller 15,000k for it.

Now no matter whether he knows the market in that area or not, that house a landlord would make an ROI of 45% - 60%. This is very frustrating.

Originally posted by @Mehran K. Kamari:
There are many properties that at retail price (based on actual sold comps) will generate over a 20% CoCr with a 20% down payment.... The only way I'm buying from a wholesaler is if they can bring me a property at a discount that is actually below market value (all-in).
In other words, the ROI is something the investor should be setting as criteria for themselves when evaluating potential deals. But, as a wholesaler you should be focusing on getting deals under contract at a steep enough discount that you can wholesale it to an investor well below the ARV.

This is well said.
Wholesaling Houses is like the car business.
Analogy, You go to an auction that sells cars.
You bid like 50% of blue book no more.
Your margin is like 20%.
Your worst case scenario is selling to a dealer for 70% of Blue Book.
Your best case is selling to a private investor for 90% to 100% of bluebook.
Either way you make 10% to 40%.

ROI doesnt matter. ARV matters.
Originally posted by @Curtis Daniels :
@Brett Russell - Maybe, just maybe your real estate market is different than mine, because there are plenty of investors that buy at 50% ROI. I'll give you an example of what investors wanted in a property I was selling in the Jennings area of the Metropolitan area of St. Louis.

People wanted 4k-5k for a 3 bed 1.5 bath. It needed at least 12K in repairs. It would rent out for 750 at best. That's right at 34%. That's just one example of a house sold at that rate and hardly considered a deal because of all the repairs needed to be done to it. Landlords are looking for steals in the area I'm from I'm guessing.

Another instance a guy called me up and asked me what I would pay for his nearly pristine 4 bed room 2000 sqft house he was selling on the MLS for $104,000. I told my coach what GENERAL area it was located in and he told me to ask the seller 15,000k for it.

Now no matter whether he knows the market in that area or not, that house a landlord would make an ROI of 45% - 60%. This is very frustrating.

Hey Curtis

I'm not sure I'm totally clear on what you're saying. If you are saying there are lots of investors who WANT to buy near 50% ROI, I believe that, but if you're saying that many investors WILL ONLY buy near 50% ROI, I find that harder to believe.

I guess I would say that if people are refusing the 34% ROI example you gave, then you need to figure out where/how people are finding the even better deals. But my guess is that people saying they have lots of 50% ROI deals aren't accounting for all expenses and/or are talking about financed ROI. And just because your coach said to offer $15K on the other example house, doesn't mean that type of a steal is common.

@Brian Gibbons Great Analogy, it doesn't get any more clear than that.

@Brett Russell I see what you're saying about leverage increasing the ROI for the property. With those numbers, the deals are smoking, provided they are in desirable areas to live.

But regardless of the return, if every other property in that area is providing the same returns, the wholesaler isn't really bringing any value to the table. A real deal is when the wholesaler can bring me a property that I can be all in to for much less than the true ARV.

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