Looking for the “right” home to buy can take a lot of time and effort, especially when trying to comb through the hundreds or thousands of deals that are on the market today. It is important not to waste time and maximize your efforts (see my last post on the 80/20 principle). The following is the quick mental math that I use to analyze a single family home quickly and decide if it’s even worth looking into.
First, I only look for homes in areas that I am financially comfortable with. So, if I am not comfortable with the average sale prices, rent prices, days on market, etc of a given area – I learn that first. I live in a fairly small community, so it is fairly easy where I live. If you live in a large area, like a major city, you should be focused on a small area that you can fully wrap your mind around. Never invest where you don’t know the market.
Second, I determine how much it is going to cost me to rehab the place. This is a VERY loose number, and generally just use $10,000 for a small paint/carpet turn, $20,000 for a medium turn, and $30,000 for a major remodel. This includes labor, material, closing costs, and holding costs.
Third, I look at the purchase price and add the repairs. So, if I found a house for $65,000, and it needed $10,000 in repairs, I use the number $75,000.
Fourth, I then take that final number and knock off two “zeros”. This gives me a good estimate of my monthly mortgage payment with taxes and insurance. So $750 becomes $750 per month. I know this is a bit high, but I like to be conservative.
Fifth, I add a few hundred for vacancies, repairs, etc. So I might say this property is going to cost me on average $1000 per month.
Finally, I just need to know what the average rent will be. If the average rent, on the low side, will give me $200 per month in cashflow, this is probably a deal worth looking into. If not, I’ll move on. Additionally, if the total cost I would have invested in the the property is $20,000 less than it’s value, then I will also move forward.
I believe any property needs to have both positive cashflow and good equity. There are too many good deals today to buy something that doesn’t have both.
That’s pretty much my quick and easy strategy to sort through all the listings to find a gem. I do this whole process in about thirty seconds per home, and it has worked great for me. Obviously, if I decide to pursue it in more detail I will learn exactly how much repairs are going to cost, what the mortgage will be, and more. This is simply a very quick way to sort out 90% of the deals and only focus on the ones that might be good.
image credit: NNECAPA