Determining Investment %

[Ashley Johnson]

Hi BP Fam,

How do you all determine what investment % to use when calculating your deals? I was told 65%, but I know not everyone uses that percentage across the board. Do you base the number on how hot your market is? Any advice would be helpful.

Thanks!

[Will Barnard]

It all depends on many factors. Price point, area/location, individual investors abilities or finances, individual investor's risk tolerance or business plan, level of rehab, etc.

As an example, the 70% rule (more appropriately should be named "70% guideline), is a simple back of the napkin analysis and is NOT ever to be used to make your final purchase decision. It is just a quick check to see if you are in the ballpark or not and then you do an itemized calculation of all expenses, rehab budget and ARV to see if your ROI, cash on cash, IRR, etc meets your desires/goals.

Typically, when you are dealing with properties under $200k and especially under $150k, you definitely need a 65%/70% or better deal to make that profitable as you have less economies of scale, lower profit margins for the oops and what ifs, etc. Same when you are dealing in luxury market price points where you also need 70% deals as your rehabs are typically very large, time consuming, hold times are longer, risks are higher, etc.

In summary, you need to use these % guidelines only for quick analysis and not for purchasing decisions. I have done deals at 65% or better, 70%, 75%, and even 80% and made money. I have also done deals above 80% and lost money, but the initial analysis did not have them at above 80% of course, things went wrong and as such, the % of the ARV was hurt in those cases.