Run the Numbers

ID Number: RE-013

1. Inputs

  • Potential property

2. Steps

  1. Confirm tax rolls owner is the person you’re talking to (unless a seller’s agent is participating).

  2. Verify no short sale involved (delays multiple months).

  3. Confirm whether back taxes are owed to government for this property.

  4. Estimate Revenues.

    1. Look at current rents for comparable properties.

    2. Check with property manager or National Association of Realtors Quarterly reports on Google.

    3. Look at historical rent performance over last 5 years if data is available.

    4. Use 5% as a heuristic to check rents against sale price. (example: $200 K SFH * 5% / 12 mos = $833 rent; conversely if rents are $950 * 12 mos / 5% = max price $228 K)

  5. Estimate Expenses.

    1. Estimate inspections costs.

    2. Estimate repair costs.

    3. Estimate utility costs during renovation carrying time.

    4. Estimate After Repair Value (ARV).

    5. Does Fair Market Value (FMV) = ARV?

    6. FMV(ARV) = Net Operating Income (NOI)/Cap Rate (like ROI)

    7. Add a 25% reserve buffer to renovation quotes. Estimate vacancy carrying costs during renovation.

      1. Be sure the major systems are working and that renovations are mostly cosmetic (paint, flooring, landscaping).

      2. Get durable materials (tile vs. carpet).

    8. Estimate 6% commission rate (3% for seller’s agent and 3% for buyer’s agent)

    9. Calculate 3% of the sales price for closing costs.

    10. Plan for one month vacancy / 12 months.

    11. Calculate property and PMI insurance monthly.

    12. Estimate property management costs.

    13. Estimate loan payment monthly, include points and interest.

    14. If using hard money, check hard money loan-to-value (LTV).

  6. Put enough money down to allow us to go below market rent and still make loan payment in a down market to ensure occupancy. Start at 20% down.

  7. Ethics check. Is the deal ethically, morally, and legally sound?

  8. Determine expected profit or loss.

    Note
    		 We buy profit, not properties. No profit, no deal. We make money from day one to proceed. There is enough opportunity to not worry about one deal.
    Caution
    		 We do not buy on cap rate, only on profit.

    1. Calculate ROI % (profit/money in the deal X 100).

    2. If the property cannot pull $150-$300 per month in profit, walk away.

    3. Neighborhood determines our exit strategy (wholesale, flip, hold & rent, AirBnB, Lease options)

  9. If the deal makes sense, the numbers work, and meets our minimum profit targets, then make an offer (purchase agreement).

    1. Put as name on contract, company name "and/or assigns" (in case we decide to wholesale the property).

    2. Be clear, "We don’t care how much it costs, only about the profit. If it does not make the numbers we cannot do the deal."

    3. Add "contingent on buyers' and partner’s approval."

    4. Add "contingent on financing approval."

    5. Start low. Find out what owner needs to sell.

  10. Do not participate in auctions. Walk away.

  11. Renegotiate after inspections if structural issues found.

  12. Put earnest money in escrow at a title company (set up motivated sellers for success not failure.)

  13. Find a tenant while closing on the property (if no big renovations).

  14. Get multiple bids from contractors for repairs to compare.

3. Outputs

Know whether or not the property will make you money before you buy it, and know the range you can offer before you have to walk away.

4. Revision History

Date Revision Description

2020-01-03

1

Initial

Updated on 02 Jan 2020

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