Most investors acquire properties using the same formula. To consistently make profits we need to buy the property at a 70% discount of the after repaired value (ARV), less the cost of repairs. The ARV is essentially what a fully renovated property will sell for on the MLS. At first, this may seem like a substantial discount, but after accounting for all of investor’s costs, it leaves a 15% profit margin if all goes as planned. The 30% discount will be split, 15% profit, 15% holding costs (taxes, insurance, interest, commissions, closing cost, etc.)
Here is an example
ARV (market value after renovations): $200,000
Investor’s offer: ($200,000 x 70%) - $25,000 of repairs = $115,000
If all goes well, the investor will sell for $200,000 and will make 15% profit on the sales price - $30,000.
Here is the breakdown:
Sales Price: $200,000
Purchase Price: $115,000
Closing Costs to Buy: $2,000
Interest on Hard Money Loan: $9000
Commission to sell: $12,000
Closings costs to sell: $4,000
Total Costs: $170,000
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