Is there a formula for "My Price" ?

[Tyler Mutch]

Hello Everyone, 

I have heard a lot of discussion whether it be on this website, through the podcasts, or in general discussion with investors about "their price". I was wondering how people would come up with that number, I am assuming there is some sort of formula for this, I know that a part of it also has to do with knowing your area, which just takes time and effort, I understand that part. I was wondering if there was another portion to it, again like a formula. 

Is worrying more about finding "their price" more for those who are looking to a flip or short sale? I get that it is important to not overpay even if you are just trying to rent. I would just like some input on how people go about finding "their price" 

Thanks, 

[Kevin Siedlecki]

@Tyler Mutch, I think what you are referring to is what an investor would be willing to pay for a property. That needs to be in place for all kinds of investments. 

I just do financed rentals with 25% down. What I am willing to pay for a property is based on two basic requirements, one based on ROI and one based on raw cash. I want 10% COC ROI after all expenses (maintenance, capex and vacancy included), and $1000 over just PITI expenses. Explaining why I came to those numbers is beyond the scope of this post, so just accept that as given.

To get to an offer pice, I need to know taxes, insurance, utilities and other expenses, plus calculate vacancy and capex estimates.

For example, here is a rough, round analysis of a typical property in my market. Please keep in mind this is a simplified analysis.

Gross rent: $2500/mo

Taxes: $500/mo

Insurance: $100/mo

Management: $250

So on my first metric, my P+I mortgage payment can be up to $650. That leaves me $1000 in cash each month before CapEx and Vacancy. So let's add those

Vacancy: (10%) $250

CapEx: (10%) $250

So now my total expenses (before the mortgage) add up to $1350. Let's see if that $650 mortgage payment will work. 

$650 a month would give me about a $120,000 mortgage. If I put 25% down, that would put "my price" at $160,000. Now test that against my COC ROI metric, looking for 10%. There is $500 left per month, and I put down $40,000, and to keep it all simple, lets say $5000 in closing costs, and $5000 in touchups.

Total acquisition: $50,000. 

Cash flow $500x12= $6000

COC ROI = 6,000/50,000 = 12%.

So that's a match for both raw cash and ROI. Of course all of those inputs are variable.

Remember, this was a grossly over-simplified example just to show the thought process of "my price." For a more thorough explanation of how I go about an initial analysis, check out my blog post about it: 

https://www.biggerpockets.com/blogs/6815/45137-my-...