This article gives you a foundational understanding of residential real estate investing analysis, and a formula for determining how much to offer when purchasing property for rehab and wholesale purposes.
Anyone can learn the simple skill of real estate investing analysis. The important point to understand is that the analysis will vary, depending on the type of real estate being discussed. This article focuses exclusively on residential single family and duplex properties purchased for rehab and wholesale purposes.
The first step in your real estate investing analysis is to determine the fair market value of the property after all repairs have been completed. This is done most accurately by having a Realtor run a comparable sales comparison report. Make sure the properties your Realtor chooses are truly comparable, not simply the same bedroom count, but also the same type of construction, in the same neighborhood, roughly the same age, etc..
The next step in performing your real estate investing analysis is to determine the cost of all needed repairs to bring the property into what I call “retail condition”. In other words, how much will all the repairs cost to complete, including materials, labor, and holding costs?
Once you have determined these two values- After Repair Market Value and Repair Costs- the next step in the real estate investing analysis process is some simple subtraction. Subtract the Repair Costs from the After Repair Market Value to arrive at the property’s Current Market Value.
Once you are armed with the Current Market Value of a property, it’s a simple matter to complete the real estate investing analysis and arrive at your offer price. Your offer price will be the Current Market Value minus either $20,000 or 30%, whichever is lower.
To make this real estate investing analysis process all very clear, here’s an example: Suppose you are looking at a single family home in a mid-priced neighborhood. The Realtor pulls Comparables and you determine that the After Repair Value of the property is $150,000. You further estimate that the repairs needed will cost $30,000 to complete, including materials, labor, and holding costs.
Next, as part of your real estate investing analysis, you subtract the $30,000 Repair Costs from the $150,000 After Repair Value, and arrive at a Current Market Value of $120,000. You subtract $20,000 from $120,000 and get $100,000. You also subtract 30% from $120,000 and get $84,000. The lesser of $100,000 or $84,000 is $84,000, so that is your offer price- $84,000.
Using this formula for real estate investing analysis you may miss out on a few properties you could have bought otherwise, but you will never overpay for a property, and you will always make money.
Now, go make more offers!