Thanks for the response Ron.
So, then what is a good percentage below ARV to buy as a rule of thumb? 15%, 20%, etc?
Alot of folks use this…
ARV x 70% minus rehab costs equals purchase price.
So if a home has an ARV of 100K it would look like this.
100K x 70% equals 70K. 70K minus 10K in repairs equals 60K for a MAO which stands for maximum allowable offer. Again each investor has their own game plan and threshold for tolerance. This is just a rough way of putting your number together. Some also minus holding costs which would make your offer even lower.
Nate-WI
First, I do not agree with many of the trainers who teach to get a property Sub2, keep the underlying note longterm, and rent out the house. It can be done, and yes it can be done successfully, but I’ve seen so many problems arise from it that I just don’t do it and don’t recommend it. So, let’s go under the assumption that you’ve gotten it Sub2 and you’re going to rent it and refinance the loan within a few months (there are valid reasons to buy Sub2 even if you plan to rent – including quicker closing, easier refi ability to pull cash out, etc). In that case, you’ve got to build enough cushion to cover your refi costs.
Then you’ve got to probably do a little initial fixup. It is rare to find a house that isn’t going to need a little TLC up front. Yes, it happens, but again it’s not the norm. So you’ve got to build in fixup costs up front. Front end fixup costs for a rental typically run less than rehab front end costs as renters aren’t as picky as retail buyers.
Then you need to do an accurate proforma to see what your cash flow is going to be, based on the amount of the loan you’ll have in place after your refi, or while you have the informally assumed loan, whichever represents the highest carrying costs (worst case) scenario.
Be careful to evaluate the cash flow analysis carefully as a rental. Don’t just base your buy decision on equity when you’re looking to rent. Base it also on how well it’ll cash flow. A bare minimum rule of thumb I use in my area is $100/mo. PCF (Positive Cash Flow) for a single family (unless there is a strategic reason otherwise) and $50/unit minimum for 4 units or above, WITH STRONG EQUITY. I like to get, if possible, $100/unit for 4 units or above and $200/mo to $300/mo for larger houses ($75K+ value), but for the $50K to $60K, 800 SF house which is the bread and butter rental in my area the $100/mo works. Obviously in higher priced areas and the greater the value of the property the more cash flow you want in order to get the yields most investors seek.
Then eventually you’re going to probably resell the house. You should figure you’ll use a realtor with typical commissions – which vary by area, but are often around 6% of the sales price in my area. And you’ll have more fixup on the backend to spitshine which will include paint, carpet, etc.
You need to put a rough budget together reflecting all these items. Then, AFTER accounting for ALL of these items I add 10% or $10,000, whichever is more, as a fudge factor or cushion.
What you don’t want to happen is to buy a house that needs work, then get stuck with it and not be able to do anything with it, if things happen that lead you to want to sell.
I had an instance of an investor who went out and bought a dozen or so houses just like the ones you mention and in less than 2 yrs he was bankrupt and being foreclosed on, and he had eaten through all of his savings trying to carry the pkg. Bad place to be.
Depending on the area you’re in you’re going to go through a LOT of deals to find the good ones. But only invest in the good ones. The deals are out there but you’ve gotta have what salespeople would refer to as the ‘hunter’ mentality to find them. If you’re using a mailing campaign to attract leads, it is very important that you quickly screen deals on the phone before spending valuable field time. You could go through as many as 50 to find a good one. You’ll quickly learn to say one of my most often spoken works “NEXT”. Don’t get so anxious for a deal that you get into one that doesn’t work.
Now, this whole discussion above is based on your buying in a non-speculative fashion. If appreciation is solidly 20% then its a different ballgame as you’re buying for appreciation too but if you’re ignoring appreciation and just looking at the first two profit centers for your investing – cash flow and debt repay from rents – then the above minimum margin analysis works, at least for me.
Good luck with your investing adventure.
As always, excellent info Ron…very informative.
Can you please show the basis in law for your conclusion above? The SC and WD are all that is needed to show ownership.
I think what he was trying to say is that no one else knows that you own the property if the deeds are not
recorded! In my state at least, you are granted ownership once the deeds are fully executed, recorded or not!
Recording the deeds gives added protection and puts the public on notice that you are the owner of record.
huh?? how is this accomplished?
I’ve heard of having people being added as an authorized party to
get loan info, but not about actually being added to the loan itself.
Ron, I need some help!
I want to purchase a property from an elderly lady who really wants to sell her single family homes. She owns the house with a mortgage of $26,000 note. The property needs some work, approx. $20K to bring it up to good shape. I am not in position to purchase the property via a loan. So, I was thinking of doing a lease/option or a contract for deed. In either case, I will be responsible to fixing the property up and preparing it to re-sale or tenant/buyer. Which option is best?
Regarding the reply below:
TonyDiCorpo is correct – I meant to say added to the loan account for the purposes of obtaining info, NOT being added to the loan itself from a liability perspective.
Good catch Tony…
Ron,
Thank you for these most helpful postings! I am learning so much.
In your example bellow, do you apply the 50% rule to get to your cash flow figure?