First Post - 50% Rule Question & Deal Eval

Rehabbing, Fix and Flip, Rental Properties
1

Hi all - I’m obviously new here. I’ve ready about 30 pages here and about 75 pages on “another” REI/Landlording site.

I think I have a pretty good understanding of alot of things but I did have a question about the 50% rule that I can’t seem to pin down.

Do you guys use the TOTAL purchase price to calculate the PI or just the amount financed?

I’ve been researching some properties (SFH) in my area and I’ve found two that look pretty good.

The first one is for 70k, very, very nice area, comps are all 110k-120k and I can probably rent it for 1200.

Second is for 57.5k, nice old family neighborhood…comps are all over the place but the $/sqft is pretty low relatively speaking. Can probably rent for 1000-1100.

Both need less than 2k to get them rent-ready.

I’m planning on getting 15-year personal mortgages for both at 5.375%.

Thanks in advance!

-Robert

2

You should figure your “all-in” price. Include your purchase price and rehab costs. If you come here and say you bought a house for $5k that cash flows like crazy using the 50% rule, but needs 50k of rehab - your numbers will be much different when you figure the rehab costs.
Remember, the quality of the deal doesn’t improve by putting down more money. Your total cost is what matters - period.

3

Kostas,

I think you’re talking about ARV (After Repaired Value), am I correct?

If so, you’re also wanting to buy at 50% ARV?

In that case, you want to take the repaired value of the property, multiply that amount by 50% (or divide by 2) and then you’ve got your base figure. Then you subtract the costs of the rehab from that.

For example, let’s look at the following…

$100,000 ARV (after repaired value based on similar comps)
less “50%” discount <$50,000>
equals $50,000
less repairs $2,000
equals your maximum acceptable price/offer, or $48,000.

This last figure represents a purchase at 50% of ARV including repair costs.

BTW, the nicer/newer the neighborhood, the more competition there’ll be and the lower the discounts generally. However, my limit is 70% of ARV, less repairs. This way I’ve got plenty of room for hiccups and failed escrows, etc. regardless of the location.

Also, I would be very careful to account for the average number of days on market for your farm area. If things are NOT selling fast, your carrying costs are necessarily going to be higher. The other important thing to account for is the actual numbers of comps you find. If you’re not finding at least 3 comps that fall within 10% over and above the subject property’s lot size and square feet of living space and transfer dates that fall within the last 90 days, it means not much is selling in your farm that fits what you’re intending to flip and/or there’s not much demand for your size/location of product.

You have to take these factors into consideration, unless you want to turn your real estate business into the casino business!

As far as P.I. is concerned, this is your principal and interest earned/paid on a loan itself, and has no bearing on the purchase/sale price. Of course the bank cares what the PI is in relationship to your income level… and will set a limit on “loan to value” in every case.

Hope that helps! Have fun!

4

50% / 2% is the rule. 50% LTV or the total amount in is 50% of the ARV. ARV is best found by getting comps from an agent. 2% means that the monthly rent is 2% of the purchase. $1200 in monthly rent at 60K all in is 2%. I hope this helps.

5

I would LOVE to find the 2% deals where I live. 1% is hard enough!

6

1% is honesty horrible cash flow. In my market we find 2 sometimes even 3+%. You have to minimize risk before you maximize annual return, cash flow and equity are mandatory in my mind or you are taking unneeded risks. My recommendation is to consider another market. It’s the same due diligence you just do a little more for out of your area.

7

That’s the only way to do it, especially now since it’s a buyers market. In some places like NYC or San Fran it will never happen. But in Dallas those deals are a dime a dozen.

8

I agree with motivatedceo, the big cities many of which where hot during the boom are overpriced and have horrendous cash flow. Equity is not good enough, you must have cash flow to have multiple exits. The result is low risk and high return, anything else and you are taking unneeded risks. We have done 100s of hours of research on where to invest. The factors and due diligence tell the story and areas like CA, FL, Phoenix, Vegas, NYC and big cities do not even come close to making the grade. Can you find deals there? Sure, but they are few and far between and likely have been bid up by excessive competition. The areas that are absolutely ripe to crush it in the market are the smaller cities, many in the midwest. My favorites are Cleveland, Columbus, Indy, Memphis, Dallas, Pittsburgh, Cinci and a slew of other smaller cities. Savvy investors will absolutely destroy it in todays market in these areas, just ask motivatedceo more about Dallas.

9

I would sign-up for a 30yr std mortgage, keeps your payments lower which will nice when if you have any extended vacancies. Just figure up what the payments have to be get it paid off in 15yrs and pay that each month unless your short on cash flow that month.

There may be a good reason to have a 15yr mortgage that I don’t know of, but it seems to me to keep the payments lower to help reduce your financial requirements each month. Never know when a HVAC unit or refrigerator will go out and you have to shell-out $300-$2000k to replace them.