How To Calculate An Offer For An Investment Property
So, you’ve decided to be a Real Estate Investor. You looked in the MLS, talked to a Realtor and found a house you want to look at. What’s next. You have a couple of tasks:
- Find the ARV (After Repair Value) – this is the price the house should sell at IF it is fixed up to the same or slightly better level as the rest of the houses in the neighborhood that sold recently. That Realtor you found can help, they will find COMPS and can tell you approximately what it should sell for if fixed up. Be skeptical. Their job is to sell the house at the highest price. But they can give you a starting point. The details of how you do this yourself is the topic of another blog post. You want this number before you go see the house.
- If you are going to rent the house (instead of Fix and Flip) then you will need the going rent value that you can get for a house in this neighborhood.
- Now it’s time to go see the house. You need to get a list of repairs that are needed. You can use online tools like https://rehabestimator.wpengine.com (or some of other online sites) or a simple spreadsheet with all the possible repairs and how much they cost. Again, another blog post on what you need to look for. Actually, a bunch of posts.
- So, you determined what the repairs are going to cost, and you have the After Repair Value and the Rent. Depending on the Exit Strategy you use 1 of 2 equations. Either the ‘fix and flip’ equation (below) or the Cashflow equation (complex enough to warrant its own post).
The Fix & Flip equation is also called the 70% equation by some people. It is simply to take the After Repair Value (ARV) time a multiplier (such as 70%) then subtract the Repairs and this gives you the Maximum Allowable Offer (MAO). The multiplier changes over time, so right now it’s 70% for most properties. Really nice areas it can be 80%. As the market goes DOWN then it can be as low as 65%.
Written out:
MAO = ARV * 70% – Repairs
This gives you the MOST you can pay cash for this property you are looking at. The 30% (remainder after 70%) is where some costs for the 2nd closing and your profit come from. Normally, if all goes right you can expect to make 20% profit. Note that word MOST – don’t go over the MAO you just calculated. Every time you do, you will get in trouble. Under is fine (hey, more profit is always better), but not over. And don’t fudge on the repairs. Yes, you can do them yourself and save some money but don’t calculate it that way. Calculate it as if you are hiring it ALL out. Again, more profit is better. After you have some of the work, you may get busy or tired or whatever and want someone else to do the work.