Flipper · Philadelphia, PA · Member since 2008 · 61 posts · 2 votes
Good morning all. I need a little help as I'm trying to crunch numbers on different properties and arrive at a number that that I should offer using the 2% rule......well kind of. I hope I explain this right. I know what the 2% and the 1% rule is. My question is, if armed with only the rent info and the repairs, is there a way to come up with the max amount you should pay for a particular property? In essence I'm trying to somehow develop a formula that does the 2% rule backwards. For example if a house is 68000 and requires 40000 work, I'm all in 108,000......under the 2% rule I'd need $2160/month in rent. Now is there any figure i could use that if I have the 2160/month figure and I know that a place needs 40000 work that I arrive at a MAO? Please tell me if this is even possible. I hope this question is clear.
Good morning all. I need a little help as I'm trying to crunch numbers on different properties and arrive at a number that that I should offer using the 2% rule......well kind of. I hope I explain this right. I know what the 2% and the 1% rule is. My question is, if armed with only the rent info and the repairs, is there a way to come up with the max amount you should pay for a particular property? In essence I'm trying to somehow develop a formula that does the 2% rule backwards. For example if a house is 68000 and requires 40000 work, I'm all in 108,000......under the 2% rule I'd need $2160/month in rent. Now is there any figure i could use that if I have the 2160/month figure and I know that a place needs 40000 work that I arrive at a MAO? Please tell me if this is even possible. I hope this question is clear.
Have you utilized the Analyze rental property calculator ^^^here on BP? It might help.
Funny, all of the so called percentage rules are actually just guides and not real rules at all.
Using the purchase and rehab costs from your example: if the ARV is in the range of $130,000 or better and the monthly rent(s) cover the mortgage plus additional rental expenses then its a good buy. You can get rental comps from the same websites that you get sold comps - using the same analytical methods. The numbers(purchase price & related expenses, ARV, rehab costs, rent, mortgage etc) will always be the deciding factor if its a deal or not, regardless of which percentage rule you utilize.
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
10y
Simple math. Start with you givens on a property, the " I can't change these things since they are mostly out of my control" numbers:
Market Rent Market Property Values setting the ARV for the Property REHAB needed on the Property Monthly Taxes and Insurance Property Manager Monthly Fees
Now, calculate your Mortgage payment (refi payment if you are buying with all cash) using the terms you get from your funding source for:
Percentage of ARV * ARV = Loan amount Term in years * 12 for number of payments Interest Rate
....There are a number of free apps for this.
With the above info, you can calculate the maximum amount you can spend on buying the property. DO NOT GO OVER THIS AMOUNT...for ANY REASON.
Formula: ARV Method ARV * %ARV for funding approval - rehab cost - misc costs = Max Offer
If the "cash Flow" result is lower than the minimum number you require for cash flow, then you must lower the purchase price (offer) until the monthly payment is low enough to get the Cash Flow at or less than your minimum allowable Cash Flow.
If moth formulas (not just one) don't give you the results you need, then pass. In other words, your maximum offer will be the lowest Max offer generated by the two formulas above.
Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
10y
@Bruce M., didn't you answer your own question? If you want 2%/m gross rent of your purchase cost (including repair cost), by definition using your example scenario, your MAO would be $68k.
Yes, that was just being flippant, because I know you want a more in depth formula you can plug into. If you look at everything that @Joe Villeneuve said, I hope you now realize that there is MUCH more information required to analyze possible deals than any simplistic 2% "Rule of thumb". Cheers...
Investor · Beacon, NY · Member since 2015 · 30 posts · 7 votes
10y
After reading Frank Gallinelli's book about key financial measures for real estate, I realized that the Internal Rate of Return (IRR) method will give the clearest picture for comparing RE investments. You can find it in your spreadsheet as the function named MIRR.
Flipper · Philadelphia, PA · Member since 2008 · 61 posts · 2 votes
10y
Thank you all! I'm just building a form in podio that does some automation on the back end and getting at the proper formula helps in my automation. Again Thanks for your help!