How do Investors's determine what to pay for a property?

 

 

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

Property A

ARV (market value after renovations): $200,000

Repairs: $25,000

 

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

less

Purchase Price:                       $115,000

Repairs:                                  $25,000

Closing Costs to Buy:               $2,000

Interest on Hard Money Loan:    $9000

Insurance:                                    $500

Taxes:                                       $2,500

Commission to sell:                  $12,000

Closings costs to sell:                $4,000

 

Total Costs:                            $170,000


Profit:                                      $30,000

 

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