Real Estate Investing 101As per a transaction participant- wholesaler
The keys to the game are;
1) Positive Cash flow....at least $175/month to be worthwhile.
2) Appreciation if possible. If your in it just for appreciation be sure you
invest at the bottom end of cycle and be in the selling mode with in 5 yrs or
less. When your in it for appreciation your a speculator
not a buy & hold for
ever mode.The market $ determines when to sell,
not your emotional attachment.When I started learning the experts talked of ARV price times 70% (30%
discount, "Investor Margin") minus rehab cost minus my profit margin to
arrive at offering price as a wholesaler.
Class "A" areas might only require at 72% Investor Margin.
Prices of RE go up and down in a cycle. A sellers market phase while later
becomes a buyers phase. Your offering/selling price has to adjust to the
phase market is in. Why?? If you can move property quick you can
pay more for it but if your rehab will take 90 days and market is going
down phase your offering price had best reflect this. What if the average
days on market are
250 DOM? (adjust offering price down because
of added cost factors you will be paying.)This is true for single family homes, downtown high rises and industrial complexes.
Note: Above is referred to as cost factor. Even if your not a hard money
borrower be aware of what your opportunity costs can be. Receive 75%
financing of a $100k ARV property. They charge -for an easy example-
4 points plus 12% interest (=1%/month),
real world is 4 pt's + 15%. and up$3,000 Points: 4% x $75k
Interest 1%/month = $750/30 days 90 days
Insurance $750/yr, 1/2 down = $375 plus $25/month 90
Tax's $1200 yr 1200/12 = $ 100 month 90
Gasoline etc drive there a few times, printing, supervise contractor etc
$6,200 Sub Total
Other expenses Transaction (Title/ docs etc. work)
$7,000 Rehab or get ready expenses ( get actual bids from contractor)
$14,420 SubTotal HD Money appraisals for $ releases to contractors
plus miscellaneous/over runs
$17,300 Grand Total - assumes 90 days from close to rent collected.
Now you have$75k minus $17.3 expenses = $57.7 for property.
You have $25,000 of captured (unrealized capital gain)
Note: This assumes rent levels in area will cover long term financing and
other monthly expenses leaving you $200 minimum cash flow and will
take less than 90 days from closing to occupied by renter.
Back to areas:
Very desirable Class A area ARV x 72%.
Average class A ARV x 70%.
What they don't teach in RE school B area may be ARV x 60 to 65%
C area may be ARV x 55 to 60%
D areas (close to a "war Zone") ARV x 52 to 50%
Your city is not one market. All % change for each part of your city.
Summary:
1. Buy for Positive cash flow,
2. If expect appreciation buy towards bottom of price cycle
***(when everyone is getting in, your to late)
3. Area classification only determines initial discount from ARV.
4. Multiply Classification % by 110% to 50% depending upon phase of market
5. Subtract your rehab cost.
6. Market it for rent before rehab is complete
7. Buy a warranty to cover major maintenance repairs
8. Keep a cash reserve to cover all your insurance deductible
((
not all of 1st years cash flow is to play with or life on))
CRITICS: It's very easy for someone not involved in this (RE Investing) to
say Hay your ripping off D areas. Well let them invest there $$,
over pay and then try to sell in a down market. Me, I'm not a millionaire,
I don't receive gov't tax credits to invest in these areas so I can't afford to
just give my $$ away.
ALSO they are forgetting that when you resell it the normal way you loose
12% off the top ( 3% buyer agent, 3% listing agent, 6% FHA financing,)
Another 5% deduction allowance for carpets or what ever, an other
5 to 10% cut to sell it in 30 days not 190 days. So now you profit margin
is reduced by 15 to 20%.
END of RE Investing 101.
* ARV = After Rehab Value...Fair Market Value
* Areas "A" new,
A+ example Plano vs Dallas
B nice but a bit older
C OK but be carefully walking at night
D if you don't live there you will not feel safe after sun-down.
(( I'm using Area classifications as per commercial unit lender guidelines))
