Well, I want to take the next few minutes explaining exactly how much profit you should allow whether you are buying a fixer upper or buying a property that is already rented or ready to rent or sell.
How many times have you seen a run down vacant property and thought to yourself… that would be a good investment? You see it for several weeks or months and do nothing about it and all of the sudden you see someone is now rehabbing it and you see a “for sale” or “for rent” sign in the yard. Then you say to yourself… “I knew that would have been a good investment! Darn, I missed that one”! You just weren't sure how much you should offer and how much profit you should allow before making an offer.
The bad news here is that there are as many different ways to analyze a deal as there are ways to put a deal together. There are software programs that you can purchase that will calculate your internal rate of return every year from now until the property is ultimately paid off and beyond. There are spread sheets that you can buy to do the same thing and you can even design your own. You can use a calculator or a simple pen and paper method.
My point is that no matter what system you use the most important thing I can share with you is that if you don't know what kinds of margins you need or if you don't know your repair costs and closing costs they will be of no meaningful use to you. You have to know what numbers to enter into your calculations to get the right answer.
I'm going to butt heads with a few people here but I am very much a big picture person. I don't use all of those fancy calculations when I'm buying. I basically need to ask the seller or realtor a few specific questions and then I can make an offer on the spot before we ever get off the phone. Is that great or what? This is why I can buy 10-15 houses every month on a consistent basis.
Rules of Thumb To Use When Making Offers
Here are a couple of hard and fast rules of thumb. And I want you to keep in mind that they are just what I said… rules of thumb.
Deal Finder Rule #1: The first rule of thumb when analyzing a deal is very simple: “If you need a calculator, it's probably not a deal”. Let me explain. If you can look at a deal, knowing the after repaired value, the repair cost and how much they are asking then you should be able to tell whether or not it is worth pursuing. If the profit numbers are so close that you have to figure it on the calculator then you probably need to say “NEXT” and move on to the next property, after making your low ball offer of course.
Deal Finder Rule #2: The next rule of thumb is also very simple. “If you have to ask someone if it's a deal it probably isn't”. Lets face it, you have at least read some books, been to a seminar or two, taken an investor to lunch, listened to a webinar or training audio or something. You know what to do for the most part. YOU can tell whether it's a deal or not so if you have to ask someone then it probably isn't.
4 Key Deal Finding Questions
Now, how do we put all this stuff to use? As I mentioned I only need to ask a few specific questions before making my first offer right over the phone. Here is what I need to know before making an offer:
Deal Finder Question #1: I need to know the after repaired value of the property or the current comps in the area
Deal Finder Question #2: What is the estimated amount of repairs or types of repairs.
Deal Finder Question #3: The associated closing costs
Deal Finder Question #4: If it is a rental property then I want to know the rent or potential rent.
Sure I will eventually find out more information but we are talking about getting our offer out there on the first call. These basic four questions will give you all the info you need to make an offer and be on your way to a deal.
How Much Should You Offer?
I know what your asking…How much should I pay. This is very simple. If you are looking at a fixer upper then you don't want to have any more than 70% of after repaired value invested and this includes the purchase price, repair cost and closing cost. Keeping a margin of 30% insures that when you are finished making the necessary repairs, after closing cost you will still have 30% equity. Then you can sell it, refinance it, lease option the property or rent it for cash flow as well.
Now, if you are looking at what I call an “instant landlord” property then you can pay a little more than 70% of value. After all there are no repairs to do on your part. My rule is not to pay anymore than 80% of value and maybe 85% of value if the cash flow is good and there is good possibility of appreciation.
All you need to have is a simple calculator to figure what to offer while on the phone with a seller or submitting an offer by email. Let me mention here that it is extremely important that your deals are home runs, especially your first few. That is the critical stage in your investing career that will make you stay in or get out.