How much would an Investor spend?

Question

Hello Bigger Pockets familia!

Quick Question..

I live in an area where the average home value is pushing $300,000 (City of Elk Grove.. Sacramento County). Which I enjoy to say the least. Investors say pay no more than 65% of the ARV. Makes sense. However what stumps me is the logic. Will investors put in, $195,000 in hopes to profit $105,000? Not that anyone wouldn't desire to make 100,000, but to risk $195k just seems unlikely to me. The majority of people I know spend far less on an investment.

J Scott · Answer

Actually, the formula is 65% of ARV minus repair costs.  Typically, 
  the profit potential is about 15-20% of ARV -- in your area, that 
would   mean putting in about $240-250K to earn $50K.

Couple things to keep in mind:

-
   Yes, there are a lot of professional investors who are thrilled to 
get  a  15-20% return, even if it means putting in $250K (assuming they 
have   it).

- For those who don't have that much cash, there are 
other   options -- like borrowing some or all of the funds.  If you do 
this,   your profits will be lower (you have to pay the loan costs), but
 you may   find that your percentage returns are even higher.

- 
There are   people who prefer to invest in areas where houses resell for
 $100K;   there are others who prefer to invest in areas where houses 
sell for   $1M+.  If you're not comfortable with values in your area, 
the best   alternative is to find another area or use your funds to 
partner with   investors in other areas.

Brennen Cook · Answer

http://www.biggerpockets.com/forums/223/topics/200...

I posted last night late 8n the success stories. I would be glad to be added to your buyers. Take a look. I'd love to get in touch and I can explain what I look for. Feel free to email or call.

Brennen.Cook@CookFamilyHoldings.com

916.759.2118

Georgio Tate · Answer

Thanks Brennen! That really helps!

I can't wait to see those numbers! And I'd be more than grateful to add you to my buyers list. Would you mind messaging me what it is that you look for?

Brennen Cook · Answer

Hey Georgio!

Shout out to Elk Grove, CA. Resident right here myself.

Remember that the 65% rule is just a rule of thumb. A tool used to help us analyze a deal. I find its best to pencil it all out. It helps to understand the many ways investors calculate ROI and the definitions used such as capitalization rate, net operating income, debt service,  cash on cash return, etc.

In your question you use very broad numbers. You do not account for rehab costs, 5% real estate commission, holding costs, taxes, insurance, etc. To answer you broadly though, YES ALL DAY! I look at my cash on cash return. I aim for (as high as possible) no less than 20 to 25% on most deals. And that's annualized.

With your numbers, $195k in to profit $105k, your looking at a 53% return on the flip in whatever timeframe. Call it 6 months at most.. if you could do that to fill up the year you'd annualize out at 106%!.. cash on cash return I mean. ( Eacheck deal would only require 195k of your personal cash at a time. You would profit 210k in year, if repeated). Find me a deal like that and I have some money for you!

Keep an eye out. I just did my first flip in Cameron Park, CA and am about to post the in depth numbers and pictures tonight. You can look at the real life dollars spent and the real life profit made.

Georgio Tate · Answer

@Seunglee I think I may have caused confusion. What I meant was that people invest less money for deals. Whether they make 100,000 + or not, from the posts that I see, people invest numbers no more than 50-70k. However being that we'd all like to keep whats invested under 66% generally, depending on the home value (say 300,000), I would assume people would pay far more than 50-70k. Thus.. $195,000 ..which seems pretty high.

Seung Lee · Answer

If you can reliably find deals that net $100,000+ with spending "far less than $195,000" why are you on this website?  You should be busy doing more such deals!