When purchasing a home for investment with the intent to Flip or Hold you need to consider what your Maximum Purchase Price should be for each deal. In Real Estate Investment you make your profit when you purchase.
So, how do you arrive at the Maximum Purchase Price? It’s actually pretty straight forward. Let’s setup a scenario.
- ARV – First we need to figure out what the ARV (After Repair Value) will be after fixing/rehabbing the property and in this case it will be $120,000.
- Profit Required – We need to figure out what our Profit needs to be and we will use 20% of the ARV which will be $24,000. The Profit Percentage is something that you need to be comfortable that it will be enough for all of the work involved.
- Soft Cost – Soft Cost includes items like Real Estate Commission, Architectural, engineering, financing, legal fees, and other pre- and post-construction expenses. Let’s use 10% which will be $12,000 but this number depends on the situation for each property. Perhaps we need to add an additional structure and the Architectural price would be higher or none at all.
- Repairs – We need to figure out what the Repairs (Rehab cost) will be in order to bring the property up to code, fixed/rehabbed and looking great. In our case it will cost about $15,000.
- M.P.P. – Lastly we calculate the M.P.P. (Maximum Purchase Price or Best Offer) by taking the ARV – Profit Required – Soft Cost – Repairs.
It’s time to put it all together and see what our Maximum Purchase Price should be.
|Soft Cost 10%||$12,000|
The above example is a general guideline and you should adjust the Profit, Soft Cost and Repairs according to each deal.