crunching the numbers

[Christian Barth]

Hi my name is Christian I am 21 years old from Minnesota. Im new to the site and to the world of real estate investing. How do I put numbers together to see if a property would be a good investment? Im in school for carpentry and am in the process of getting my real estate license. Im trying to get a jump and understand the business more. Any replies would be appreciated. Thank you!!

[Ammon Brimhall]

Hello Christian

Way to get in the game early!! I got in when I was 22 and boy am I glad I did. Stick with it, be consistent and treat it like a marathon and suddenly you'll be 10 years down the road and AMAZED at where you are financially. It's a great ride! (There are risks too, but stay sharp and keep asking questions and I think you'll find a way to success)

As for your question -- there are a lot of answers depending on what you are trying to do and how fast you are trying to do it. Here are a couple of numbers I use -- and many other investors too -- although others may prefer to tweak the percentages a bit for their style or individual market.

Flips or rehabs -- Take the After Repair Value of the home (ARV) and multiply it by 70% and then subtract the rehab. The after repair value of the home is simply what a home is worth AFTER you've done all the rehab to it. This number is a ball park (not exact number) for the most you would want to offer if you are going to flip a home. 

Summary -- (ARV x 70%) - rehab = MAO (Maximum Allowable offer) for a flip opportunity.

There are a million things I could share about comps or exception to the rule or why we chose the 70%, but that would take all night to explain so I'll leave it there. You have a good rule, and with time you'll get all the nuances.

Wholesaling -- Take the MAO calculation above and subtract your wholesaling fee. I won't tell you what a "good" wholesaling fee is because it really is all over the map for each person, but as a beginner you tend to get less and as you gain more experience and learn how to tell good deals from the bad you get more. Don't be afraid to bird dog a deal for a few hundred dollars if it will increase your experience and prepare you for the next deal. In other words, don't let greed get in the way of growth.

Rentals -- Again, this is a general rule and subject to a lot of exception but it's called the 1% rule. It says that if you can get 1% of the value of the home (some people say you should use purchase price, not value of the home) then you should have a positive cash flow. For example -- a house worth $80,000 needs to get $800/mo to be a positive cash flow.

Again -- there is SO much more I could tell you, but won't here. Just know that while rentals ROCK, beginners often think there is more cash flow than there really is, so do you homework!

I hope that helps!