Purchase Price...?

Rehabbing, Fix and Flip, Rental Properties
1

THis question is going to be very vague, however, a vague answer I guess is what I’m looking for.

I live in a city in Canada which it’s economy is very dependant upon the North American auto industry (economy currently similar to Detroit’s), so as you can imagine, my city is getting hammered right now. Although, this is a terrrible time, I see potential to buy very low while obtaining very attractive financing rates.

I’m am currently looking at 2-4 unit multi-family properties.

Question: Hypothetically speaking, assuming the property doesn’t need any work, what percentage of ARV would be the maximum offer you would make to the seller considering the/a horrible real estate market?

2

there are many posts on this topic. a poster named propertymanager has written this up pretty well a few times. if you search the forum, it should be an easy find.

basically, it’s something along the lines of Gross Monthly Rent / .02 based on your expenses being 50% of your Gross Monthly rent…

but still, search for the explanation (so you can read the larger discussions)…

good luck

3

bdub is right. Gross monthly rents / .02 would be a good screening tool for max purchase price. In a really crappy market, I would also try to buy at a max of 50% to 60% of the market value. That shouldn’t be too hard to do in a dead market. The worse the market, the better the deal has to be!

Good Luck,

Mike

4

Buying to hold or are you going to be selling them off quick?

5

I will be buying to hold as rentals…

On another note, I have been looking for a while now and find that most of the 2-4unit multi-family properties listed in my city are all priced at a 9% cap rate and lower even now with the my city’s market at an extreme low. ( I know cap rate shouldn’t be the only tool used but I’m using it as an example)

I obviously know that there are deals out there, but it is a bit discouraging seeing properties being listed as if the market was fine.

6

propertymanager can you explain your formula a little bit more? are you using this to figure out the purchase price for rehabs or holding and renting? I tried to find your previous posting in a forum search but had no luck.

7

Just put maximum purchase price in the search along with propertymanager. There are a bunch of posts.

Mike

8

You can also click a user’s name and click a link in their profile to see all of their posts, here’s Mike’s posts: http://www.reiclub.com/forums/index.php?action=profile;u=8204;sa=showPosts

9

I just run the numbers and if I make + cashflow in my simulated worst case scenerio Im in.

10

thanks guys!

11

Mike,

I have learned a lot from your posts and really appreciate your contributions. Being new to the prospects of rentals, I am curious where the .02 comes from. I have searched the forums on it, but obviously that number (in various combinations) comes with many results.

Is it based on some debt coverage ratio? Could you please break it down a bit more?

Respectfully, Rodney

12

vastalsgap,

The .02 comes from my assumption that you need to receive about 2% of the cost of the property each month in gross rents to have an adequate positive cash flow.

Mike