This is a question I get asked about 20x a day, so I thought I’d address it in a blog post. There are so many investors out there asking themselves if they have a good deal or not sitting in their lap. How much is too much to pay for this property? So how do you know if the numbers on your deal work?
While many investors have their own formula to determine if a deal works for them, many new investors do not. I have a lot of investors I fund deals for that use their own spreadsheets or spreadsheets that were given to them, some of my investor’s just use a gut feeling. I use the following formula to figure out in my head when walking a property to see if the numbers work:
Sale price – Fixed costs – rehab costs – minimum profit = my max purchase price
I define my fixed costs as – title, appraisal, realtor fees, Attorney fees, prop taxes, utilities and insurance. If you are borrowing money than your holding costs (monthly payments, lender fees) should be deducted as well. And then your costs on the selling end – realtor commission, seller concession, home warranty, MLS fees.
Minimum profit – this is very simple, how much is the least I would want to make on this deal.
Let’s take for example
$100,000 purchase price
$10,000 fixed costs (assuming you are paying cash and no lender fees)
$25,000 profit (the minimum I would make on a deal)
I would need to purchase this property at $40,000 or less in order for this to work for me.
Now let’s assume it’s the same property, but I need to add financing costs on what I expect to be a 120 day project (I use 1k per day of the rehab budget to estimate a 25 day rehab, add in there an extra 10 days to allow for inspections and 90 days for the end buyer to close). Using 1% per month interest and 4 lender points – so on a 4 month project its costing me 8% to borrow the money and a loan amount of $60,000.
$60,000 x 8% = $4,800 loan cost
$100,000 purchase price
$14,800 fixed costs (including financing costs)
Total $35,800 – this is what I would need to pay for this property (or less) in order for this deal to work for me.
One of the biggest issues I see, especially with new investors is nailing the fixed cost of the loan. Make sure your numbers take into account everything you will be spending money on along the way to ensure you turn a profit.
If you have a rehab loan for us to look at