Hi all!
I am working with another wholesaler and she has a property under contract for $85k. The ARV is $110k. The gross rent ROI is 17.24%.
The avg sold price in the area is around $77k. My question here is what does the gross rent ROI mean? Do I multiply the 17.24% into
the $85k to see the actual profits? Lol…please, help…I’m a greenhorn.
If the ARV is 110, that usually means it will need to sell for 89- 99k unless you want to drag it out for months trying to find the perfect buyer, and ther is already another wholesaler involved? You got as much chance of making money on this deal as… Well, I don’t see it happening, find a better deal, don’t waste time on these what ifs and other BS. Find deals at 50% of ARV, then you can adjust, negotiate etc and actually make some money.
The deals are out there, I got 3 this last week. Takes marketing, bird dogs, direct mail, bandit signs and making friends with all the Real Estate wholesalers, buyers, Rehabbers.
If the average sold price in the area was around $77K, then you would be out of your mind farting around with this overpriced property. I mean why? The ARV isn’t 110k, it’s $77k. I mean, come on.
Never mind the 17.24% “rent ROI” is some nonsensical stat that could mean anything, without having some basic data supporting it.
For example, the ROI is based on the NOI. The net operating income is income after all expenses.
Standard practice is to assume that the NOI is 50% of the market value rent (not to be confused with actual rents, which may be significantly different/lower, and reflect a poorly maintained property).
So, all things being equal, with no over/under rehabbing, 50% of the rent will be left over for debt service and profit.
After paying debt service, you have pre-tax cash flow. After you’ve paid taxes, you have after-tax cash-flow, which will be enough to buy a pack of Juicy Fruit (as long as you don’t invest in this loser of deal, as described).
Meantime, on a house with an actual $110k ARV, and assuming a standard investment-quality rent/price ratio of 1%, or $1,100/mo, the cash flow after all expenses would be $550/mo.
Well, if you put $22,000 down, and borrowed the rest at 5%, over 360/mos., the payment would be $472/mo, leaving $78/mo in pre-tax cash flow.
$78/mo times 12 months, equals approximately $936/year in pre-tax cash flow, or a 4.24% R.O.I. (to state it the most simply)
Well, unless the rents on this baby run more than $1,500/mo, the only way anyone’s gonna achieve a return anywhere near 17%, is if you put less down, create more leverage, and otherwise sacrifice cash-flow to compensate for that high-leverage.
I mean you could beat that “17.24% rent ROI” like a skid-row prostitute, if you only put down $100, and could squeeze out $50 in annual cash-flow.
But that’s the kind of sales pitch you pull on somebody that writes with crayons, and consults with his wife, who happens to be his sister.