Everyone has their price. The key to good property investment is knowing what to pay and what is not practical. I use a simple method to determine what I am willing to pay for a rehab property. It has served me well.
Again, there are a couple of myths that need to be addressed before you decide how much you are willing to pay for a property.
Myth #1 “I can pay it off in 20 years”
I don’t know about you, but I am not willing to wait twenty years to see a return on my investment. That’s just too darn long. When I started rehabbing, I decided I wanted to see a return in 2 years. I now stretch that to 3 years but that is as long as I am willing to wait. Consider carefully the length of time you are really willing to wait to see a return on your investment.
Myth #2 “If I can clear a couple hundred a month…”
This strategy almost never works. Things come up. Besides, why would you be willing to take scraps of what’s left over after you pay costs, if you can take it all after just two or three years?
Here is the formula I use to determine what I am willing to pay for a rehab property.
1. Rehab properties almost always need the same things. They need new roofs, new furnace, all cosmetics, new electrical and a lot of trash removal. I do most the work myself, which saves a lot of money. For example, if the property needs a new roof I will figure an estimate of what my supplies will cost me. I also figure the furnace, electrical, etc. Don’t get too elaborate here, but figure general cost in your area. I over estimate on cosmetics to make up for any adjustments that may be necessary.
Roof -- $3,000
Furnace -- $3,500
Electrical -- $3500 (hired)
Cosmetic -- $10,000
The cost of this rehab will be about $20,000.
2. Now, research what fair market rents are in your area. I can get $850.00 a month for a 4 bedroom house. I am willing to go 3 years before I see a return on my money.
$850 X 36 months = $30,600
3. $30,600 – $20,000 = $10,600. I would be willing to pay $10,600 for this property.
The key about computing these costs is this: Once the property is bought, don’t ever figure the costs again! Why? If you are being diligent and prudent with how you are spending your money, there would be no benefit to recalculating costs. I can tell you my calculations came up a little short a couple of times, and I was ahead a few times. It doesn’t matter. Now you have a great investment that will bring you years of income!