Real Estate Investors Formula To Use When Buying Property – Big State Tutorial

[♪ music ♪] [Investing 101: Formulas for
Buying Properties] Hi, I’m Brian Spitz with
Big State Home Buyers, and today we’re talking about
Investment Formulas 101. What we’re going to cover
really quickly is what the different formulas
are that you should be using
as an investor when you’re looking to
purchase property, and there’s a few of them that
have been standard over time. The old one, of course,
everybody knows is 70 cents on the dollar, 70% of ARV less repairs equals MAO, maximum allowable offer, which is a term that a lot of
people use here in residential real estate
investment. That doesn’t exist anymore.
The market is too strong. It’s too difficult to get
good deals. There’s too much competition,
so there are 2 ways that I recommend that you
assess properties if you’re going to make
an offer. One is if you are going to
rent the property, one is if you’re going to
sell the property. These are based on properties
that are in good neighborhoods that would rent or sell fairly
quickly. They’re not really for the
properties that are in the multimillion
dollar range. They’re not really for
properties that are below $80,000. Those have separate
considerations, but if you’re looking at
$110,000 house in Katy all the way up to a $300,000
flip, I’d recommend you look at these formulas. One for a flip is to look at
what the property is worth when it’s done, so after
repaired value, and let’s take $250,000. In the old days you would
multiply that times 70%, deduct repairs, and then that
would give you the offer that you could make, and that’s a great starting
point, but it’s unlikely to get you where you want to
be to get the deals these days,
so what you want to do, what we do when we buy
houses is we subtract out
3%-6% for the realtor commissions,
which are going to pay out when you sell the property
to a realtor. Then you subtract out
the closing costs for when you sell the property. You subtract out insurance, taxes, utilities, and all those basic costs
you incur when you own the property,
so all the builder’s risk, the taxes while you own it,
HOA fees, home owner’s association,
HOA, insurance I said. Subtract out all of the
electric, gas, water, pool maintenance,
lawn, whatever, and then you also subtract out
the repairs. And from there you need to
decide what profit you’re willing to live with,
so for us our minimum profit that we stick
to is a $30,000 equity spread which we try to leave as
a cushion because sometimes it comes
out to $25,000, sometimes it comes up
to $35,000. It just depends on the property. But whatever this ends up,
you have a $20,000 repair bill. Then whatever this number
ends up is what you should be
paying for the house, and sometimes that number will
match the old 70 cents on the dollar, sometimes it will
be 80 cents on the dollar. The question for you as an
investor is how much are you willing
to make? How much are you willing
to invest? How much time is it
going to take? And how aggressive are you
going to be about doing a deal? If you’re looking to rent a
property a great formula to go by there
is 80 cents on the dollar for properties that are in good
neighborhoods. These are neighborhoods where
people want to live, where people have kids they
send to good schools, rent quickly, brick homes, built after 1970 or 1980. Really those are 80 or even 82
cents on the dollar less repairs, and that’s where
you should be for rental price. You need to keep in
consideration, though, in those neighborhoods what the
homeowner’s association fees will be, what kind of deed
restrictions might be applicable for when you go renovate the
property. You need to make sure that
the deed restrictions don’t prevent you from leasing
the property. Surprisingly there are some
neighborhoods where that’s relevant,
and also the taxes. You want to see if your
property is in the MUD district. Are there additional taxes you
might not be aware of, additional school taxes
and whatnot? All of that goes into
consideration. Another formula that I’ve seen
people use a lot of with rental property is
one where they’re trying to buy based on a cap rate, and so
using the capitalization rate formula what you can do is take the rent times 12 months in a year, and that gives you some number. Monthly rent times 12, and then from there you subtract
the HOA fees and the taxes and insurance, and let’s say
that gives you $10,000. At the end of the year after
you make your basic expenses you have a $10,000 profit. And what I’ve seen people do
is do a cap rate on that, so they might divide it by
.11 if they want an 11% return, and then let’s say that gives
them a $120,000 purchase price less repairs. I’m making numbers up,
obviously, so I don’t have to use algebra,
otherwise it would be all XYZ. But essentially what you’re
doing here is accounting for how much after expense
income you’re going to get looking at how many times
return you want on your money and then take the repairs out, and that will give you another
way to justify a purchase. In this instance you’re going to
pay the most for the property, but if you’re looking for a
long-term yield and you’re in a really good
neighborhood, it may be the best way to get an
investment in this competitive market. If you want to know more about
the services that Big State Home Buyers can
provide or take a look at our constantly evolving
inventory, visit us at [♪ music ♪]

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