Making An Offer
Is there a formula that you use for making offers on a rental property. I found a rental with a FMV of $75,000. The rental comps in the area are pulling anywhere from $650-$800 per month. The house is in great shape and just needs minor cosmetics. The current owners are asking $85,000 for the property, will they be offended if I offer $65,000- $70,000?
If the FMV is 75K and as an investor you would want to have cash flow. You will need to find out if you were to get the financing how much would you have to pay for the mtg. If the mtg is the same amt of the max you can rent the house for, I would suggest that this is not going to be a good property to invest in. B/c #1 you will not have the cash flow and # 2 you will not have the equity in it.
I wouldn't want to spend more than 80% of FMV which would equal 60k, I wouldn't worry about if they get offended or not, if it is a FSBO I would talk to them extensively to see if both yours and his needs can be met before making an offer
[addsig]
JRODD,
REI is a business, and business should never be based on emotion.
When you worry about offending the seller with a low offer, you're letting emotion get in the way.
Never base an offer on guilt, shame, embarassment or fear of rejection.
Your offer should be based solely on the numbers and nothing else.
And if that offends the seller, so be it.
There are plenty of other deals out there for the serious investor.
Good luck.
[addsig]
In general, it's almost impossible to pay retail, and have + cash flow. Just as a rule of thumb that is.
If you make an offer on property and you are not embarrassed by how low it is you are probably starting out too HIGH. lol
( This is not proffessional advice) Just My Personal Rule Of THUMB!!![ Edited by TNTRASH on Date 08/17/2004 ]
Sombody on this forum (I can't remember who) shared with me that a good formula to find what you should pay for property you will rent is monthly rent X 72 = your highest offer.
At rent times 72 and good financing the property should cash flow nicely.
Thanks everyone for your help. I am making the offer today. Wish me luck!
Hey,
Never worry that your offer will offend someone, but DO worry that your offer will be taken seriously.
BUT be careful...
Making ridiculously low offers on houses will very quickly get your branded as "NOT SERIOUS", by the investors in your area. In other words, walking around and offering $25k on a $100k rental.
Making an offer at $60k is NOT ridiculous; it is a good offer, as you have to make money.
where does the x72 posted above come from. I'm making an offer tomorrow on a property with ~$2005 a month if fully rented. he wants $68,000 and I'm going to try to get him down around $60,000 although I'll probably go the $68,000 if I get the right answer from the city zoning in the a.m. and if he won't budge. Property is about as 'perfect' as a city multiunit can be in my area. but with the above formula, the property would be $144,360 and that absolutely is no where near what properties bring in this area - city is almost bankrupt, sewer/refuse & taxes are sky high
x72 comes from taking the monthly income x 12 to get the annual, then a rent multiplier of 6 (I personnally use 7)
This is a common quick calc to see if something is a good deal, PITI and cap rates are more precise than this calc though.
[addsig]
Hey,
I have never heard of this 72 rule (I know the Rule of 72, but that is a different beast).
If my understanding is correct, you take current rent x 72 and determine offer.
$800 rent x 72 = $57600.
In my area, a house that rents for $800 is worth between $80k and $90k.
Good Luck using this formula!
It probably is worth 80-90 but you wouldn't want to pay that, I use 84 (12x7) instead of 72(12x6) but just as a rough "not going higher" than price. Cashflow and cap rate are more important and accurate IMO
hi everybody!
i am very new in this business and honestly i know zero. FIrst thank you for all the great info that you guys share here.
I have $10k that i want to invest in RE, but i do not know how to start. I want to by a little apt but i am thinking of buying better a 2 or 3 family home.
So far i have a friend who is selling his house a 3 family for about 350k, i think i can buy it, fix it a little bit and resale the house in three months from now..What do i have to take account, there is any book that i can read..please i really need help and i want to use my first 10k in the right way.
Thank you a lot.
Eva
Eva, I would reccomend reading more on flipping, Bronchicks "Flipping properties" is a good start
Can someone explain Cap Rate to me? I know it is NOI/Purchase Price, but what does it mean and what should I be looking for in a Cap Rate?
Thanks much for your help.
Try this page
http://www.reis.com/insights/insights.cfm?id=3749