Learn how to evaluate property. How do I know this is going to be a good investment? By: Joe Luckino
If you are looking to fix and flip a home you want to focus on the ARV or after repaired value. That is the price that the house will sell for once it is fixed up. You can get that by reviewing comparable sales through a realtor or online.
You want to find homes that have similar square footage, bedrooms and bathrooms, and same style of house. This will help you establish a market value. Once you establish that number, you need to multiply that by .7 or 70% because that’s what most rehab lenders will lend you.
Now you need to figure how much you’ll pay for it. You need to subtract the repair fees and the borrowing fees (about 7% of borrowing amount) from the 70% value of the ARV. That is how you’ll end up with what you should pay for it. Now remember, you need to offer lower than that if you want to end up there. You can always go up in price but never back down once the negotiations start. After you buy a home and spend money on fixing it up along with all the other fees, you do not want to owe more that 70% of the ARV. This is a conservative number. So as long you stick to this you should be just fine.
Now if you are looking for a rental property, you still need to use the same calculations as above concerning the ARV. You want to do this because if you borrow money to purchase the property, you need to know what it will appraise for so you can refinance it and pay the lender off. Now most conventional banks will let you refinance up to 80% LTV or loan to value. This means they will let you take a loan on a property of up to 80% of what is appraises for. So, if it appraises for 100k the bank will lend you 80k in a mortgage. If you only owe 70k on the property, you can pull out just that or pull out up to an additional 10k extra and put in a savings account for a rainy day and unexpected expenses.
The beauty about this is you can pull this money out tax free. You only have to pay taxes on the money if you sell the property. By standard rule of thumb, landlords try to make anywhere from 100-200 dollars per rental. That is after taxes, insurance, and mortgage payments. A calculation that has been around for a while and seems to hold true is the gross rent multiplier. If you take your gross rent and multiply it out over 7-10 years, it should match up pretty close to the purchase price. The closer to 7, the better off you are.
Pay attention to your math, and you will know when you find a good investment.
Copyright 2006 Joe Luckino
About the Author:
Joe Luckino is owner and cofounder of Money4Investors.com. Money4Investors.com is a real estate investing information site that helps investors find financing, other investors, appraisers, contractors, realtors and much more. Money4Investors.com also has over 1.2 million foreclosures, pre foreclosures, tax liens, bankruptcies and wholesale listings. For more information visit: http://www.Money4Investors.com.