Are you planning to flip or rent your property but don’t know how to go about it? If it is so, your search for the guidance ends here. Before you make an offer on a property and approach a lender, you need to be aware of the terms of engagement before getting into the deal else, you may sell the property less than the expected amount.DC Fawcett gives you the Real estate investing formula for flipping and renting properties.
Real estate investing formula for flipping and renting properties
Although you might have purchased the property earlier, investment in real estate is different from buying a house for yourself. Buying a personal house is a more emotional undertaking as you would have felt proud that you have purchased a property in your name but it is equally painful to part with it in times of emergency wherein you need money. To succeed in this field, you need to understand the basic formula and research on the market which is the most important factor. Once you have got the amount in place, flipping the property becomes easier.
Maximum Allowable Offer (MAO) helps you to determine the exact price to be paid for buying or selling the property. It is generally considered as 70% of the After Repair Value (ARV) and the investor cannot pay more than that of the after keeping an account for the cost of your funding repairs, holding costs and resale commission and costs. Below is the example
|ARV $2,00,000 Value of property after repairs|
|Loan (Cost of Funding) 7,000 Origination fees, closing fees, Interest|
|Repairs 30,000 All expenses related to renovations|
|Holding Costs 3,000 Insurance, Utilities, Taxes, HOA, other|
|Resale Fees 10,000 Realtor Fees (6%)|
|$150,000 ARV minus costs to flip|
|$ 105,600 Maximum Allowable Offer|
In this scenario, profit of $95,000 ($2, 00,000 – $105,600)
You can break 70% rule on the following conditions
- Resale fees s exempted when you get a guaranteed in-built buyer.
- When your cost of money is lower or you can access cheap cost.
The wholesaler uses this formula but adds the wholesale fees. They will set to 65% of the rule including their fees. In this case, it will be 1, 50,000 x .65 which results to $97,600 as a maximum allowable offer when you wholesale.
The other way of 70% Rule
All the investment properties that are fixed and flipped, needs a different amount of time, cash, and considerations. The 70% rule is the basic thing which builds up 30% profit margin and can be a great rule of thumb. However, the investors would look out for the property that can be easily flipped, ignoring the 70% rule.
Net Operating Income
The investors who are looking for the cash flow and the benefits of building wealth through passive rental income use net operating income (NOI) formula to derive the how much leverage is needed. The basic NOI formula is used when you purchase or refinance a rental property. NOI is calculated in the following way.
|Insurance – 75|
|Vacancy -100 (10%- this will vary with turnover rate)|
|Repairs -80 (In this scenario it is 8% which depends on the property.|
|Management -100 (10% budget to pay yourself even if you self-manage)|
Gross Operating Income $495. The gross operating income tells you how much mortgage the rental property can provide if you have to repay the loan from the profit you get on rental income. Mortgage calculator helps you to determine that.
DC Fawcett concludes that Flipping and renting properties are good in their own way for the investors. However, you need to do more market research to determine MAO.