I’m trying to run the numbers on potential good deals and seem to have figuring out the LTV for HMLs. I was given information that most investors like to make 30% over expenses. Is there anyone that can tell me the correct way to calculate this. Confused on if I include to purchase price of the property with repair expenses :question

MAO = (Price X 30%*) - (repairs + holding costs + closing costs)

Where:

MAO = Maximum Allowable Offer

Repairs = repairs/upgrades to make the property salable

Holding costs = the cost to ‘own’ the property until sale; mortgage, taxes, insurance, utilities, permits, etc.

Closing costs = costs to transfer the property to the new owner(s)

- This percentage may vary

Keith

Thanks…

I think Keith meant to use 70% in his formula instead of 30%.

Of course, this is the maximum price an investor is likely to pay if buying from you. You also need to factor in your desired profit, so your maximum offer will be

MAO = (Price X 70%) - (repairs + holding costs + closing costs) - desired profit

where Price is the After Repaired Value (ARV) which may be different from the seller’s asking price.

If you are talking about buy fix up and sell, then you need to be able to sell the property within 30 days. So you need to know at what price the house will sell within 30 days by looking at the sold comps. That is the price you need to use, not the asking prices for houses with 90 DOM.

I think you’re right…I think Keith had a brain cramp…must be the eggnog!

This is my first time on the forum and I gotta say I love it!!

Real quick and dumb question but I gotta know 100%, on the formula for MAO, the 70% x Price is to factor out the 30% ROI for the investor correct??

That would mean after calculating everything else into this formula if there is any money left over it would be mine?

This scenario is that I am finding an investor to supply the capital and I will coordinate everything else

Are you guys somebody using the 50% rule when screening the possible investment properties? I have read about it and it seems to be pretty simple and fast way of checking the investments.

When you find a property which is let’s say for $100,000 and you know that it is renting for $1000 a month, you will subtract 50% of the Gross Scheduled Income (estimated rents) to cover all expenses (such as vacancy loss, repairs, maintenance, property taxes,…).

Then with the rest of the income ($500) a month, you just need to cover the mortgage payments. If the mortgage payments are lower than $500, the property will have a long term positive cash flow and can be a good investment.

Do anybody else use this rule here?

I want to have the monthly rent be at least 2% of what I’ll have in the property when I put it into service as a rental. For example:

If a property will rent for $600/mo, I want to make sure I’m not going to be over 30k into it by the time I purchase it and fix it up.

The 50% rule works well for giving you a great chance of having positive cash flow.