Many real estate investors use ARV (After Repaired Value) as their determination to purchase a property.  The logic is that the purchase price plus repairs should not exceed 65-70% of the After Repaired Value.  This leaves room for profit (and some errors) when purchasing property.

This guideline works great if you plan to flip the property to a retail buyer.

But what if you face the following:

  • You wish to buy and hold the property – your purchase should be based the income that the property generates
  • You can’t quickly flip the property – you would need the option to place a renter and still get a reasonable cash flow.

Bonnie Laslo of Hobby Millionaire outlines two benchmarks for purchasing properties:

  1. The property must have a $200+ monthly net profit per $100,000 in purchase price
  2. The property should offer a 10% CAP rate (click here for definition of CAP rate).  CAP rate equals Return on Investment (ROI) when you pay cash for the property.

Benchmark 1 – $200+ Monthly Net Profit

Here are the guidelines for a quick assessment of properties:

$100,000 – $1000/month rent to break even + $200 profit = $1,200 is what it should rent for

$50,000 – $500/month rent to break even + $ 200 profit = $700 is what it should rent for

For more expensive properties:

$200,000 – $2000/month rent to break even + $400 profit = $2,400 is what it should rent for

Note – multi-family properties can consider a lower per-unit profit.  A duplex should still provide $200/unit/month profit.  For an 8-plex – you could consider $150/unit/month.  But don’t lower these numbers just to make a poor deal work for you.  [Multi-family should consider actuals not proforma or projections]

Benchmark 2 – Minimum 10% Cap Rate

CAP Rate = Annual Net Operating Income / Purchase Price

Example:

Gross Monthly Rent                                $1000

Expenses:

Taxes per month                                     ($200)

Insurance per month                              ( $ 50)

Maintenance per month                       ($100) (you should use $100/month/unit as a guideline)

Utilities per month                                 ($     0) (many older multifamily properties have one water or electric meter)

Total Expenses                                    ($350)

Monthly Net Operating Income        $650

Monthly x 10 months                              $6,500   Annual Net Operating Income (Annual NOI)

The extra 2 months you are not considering (12 in a year) are for ‘oops’ items.

Add a zero to the $6,500 Annual NOI tells you that this property is worth $65,000 max to you.  Your acquisition price plus repairs shouldn’t exceed this amount.

CAP Rate – $6,500 Annual NOI/ $65,000 purchase price = 10% CAP rate

Note – in some areas of the US, such as the West Coast, many investors find that a 10% CAP rate is challenging.  In this case your options are to either accept a lower rate, or invest in another part of the US.  These benchmarks should be considered if you are buying & holding or flipping.  Your purchase price should include the cost of all rehab efforts.

Here is an easy calculator to calculate these benchmarks.

[jazzy form = Benchmarks]

You should select the lesser of these two benchmarks as guidelines for purchasing investment property.

Wholesalers – you should ensure that the price you offer is reduced to incorporate your fee while maintaining a 10% CAP rate.  Make sure that your calculation considers realistic pricing for rehab costs.  Then consider that if you only wholesale – this is a job.  Take your profits and invest in low down owner finance deals with monthly cash flow (with a $200 minimum monthly profit and at least 20% annual return on your invested cash.

 

NOTE:  These benchmarks only address purchase price and do not consider financing costs.  I will address financing costs in a future post.

Go to  this link for an expanded discussion & calculators that discuss ARV and Cash-on-Cash return –

http://www.entrepreneursreport.com/master_real_estate_financials/

 

Notice – Entrepreneurs Report nor its authors are financial advisers.  Any guidance provided should be verified by your accountant or CPA.

 

 

I am Curtis, an entrepreneur and daredevil with no fear and a heart as vast as the opportunities I seize. As a Senior Partner in a real estate investment firm, I thrive on the thrill of property acquisitions, rentals, optimization, and sales.My network is my secret weapon - financial institutions, hedge funds, wholesalers, and bulk sellers are just some of the allies I leverage to secure properties at prices that others can only dream of. What sets me apart is my unwavering commitment to protecting investor funds as if they were my own - because in my world, trust is the cornerstone of every deal.With a keen eye for lucrative investments and a bold approach to seizing opportunities, I am not just another player in the real estate game - I am the game-changer. Join me on this exhilarating journey towards financial success and let's conquer new horizons together.

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