There are different standards and strategies that real estate investors use when evaluating properties. In order for us to get involved with a property, the following standards are judged for the worthiness of any rehab project:
“You should look for the worst house on a decent block”
1) Whether your strategy is to “flip” properties, or to hold them for their rental cash flow, it’s important to be able to draw potential buyers, or strong potential tenants, as quickly as possible. With this in mind, you should look at properties on streets that are maintained properly. This does not limit you to higher end homes. There are many “blue collar” areas that properly maintain the condition of their homes and yards. However, a street that has poorly maintained properties or many vacancies do not lend themselves to fast turn around sales or well suited tenants. Always remember that this is an investment. You take on a large risk, and a lot of work as a rehabber. No matter how much loving care you put into your property, you can do nothing about the condition of your neighbor’s property.
2) Make certain that there is no structural damage to the property. This could be a fatal blow to your investment! “You make your money when you buy a property, not when you sell it!” Purchasing Formula There are many formulas used for the successful purchase of a rehab project. It’s important to use one. There must always be a comfortable cushion between the purchase price and the selling price of investment property. This cushion price will help you achieve a successful investment, even if you have repair cost over-runs, or hold on to the property longer than you had anticipated. Remember, every day that the property is not sold or rented comes right off your bottom line. The interest, taxes, insurance, and utility bills compound each day. Buying the property at the right price will protect you from Murphy’s Law.
Our Funding formula:
1) Establish an after repair value for your property. (Get “area comps” and view each one. Pick out the property that has a street that is most similar to your house’s street, and a structure that is closest to your house’s structure, and then compare the square footage, amount of bedrooms and bathrooms that are all listed on the “comps.” This will help establish a real fair market value for your property).
2) Multiply the ARV x .65 (After Repair Value) (This will give you 65% of the ARV).
3) Establish a comprehensive and accurate list of repairs that you plan to do to the property, and estimate the costs for each repair. (This is important. If you are knowledgeable and experienced in doing repair work, you may not need help. If you are not experienced or skilled in this, find someone who is and have them draw up a plan. Even if it costs you a little money to get them out there, this could save you thousands of dollars).
4) Subtract the cost of repairs from the 65% value of the ARV. (After Repair Value) This should be the maximum price that you pay for the property! This is a conservative formula, and it usually works well. Remember, anyone can buy a property at close to fair market value, but with your costs and risks, you must do better!