This is a question that Crystal and I get asked often. I am going to try to keep it brief, but we are going to cover a lot here. How do you find and decide what your first Real Estate purchase is going to be?
When buying your very first single-family investment property, the first thing you want to do is figure out what your angle is. What is your strategy? You need to determine how you're going to move forward.
There are three basic strategies you can choose for a single-family investment property:
Let's start with the fix and flip method. There are a couple of little easy rules I'm going to talk about to help you understand what you need to be doing for the flip. We're going to talk about a rule called the seventy percent Rule. Basically, what that means is you need to be all into your flip project for 70% of the ARV. That means, purchase and rehab. The purchase and rehab have to equal 70% of the ARV. The reason is that you need 30% for yourself for tax, any overages, and contingencies that may ultimately come up during your repair process. The way to figure your offer is to find the ARV using Comparable properties in the neighborhood. Then you will figure out what your rehab budget is going to be. This is what your equation will look like:
ARV X 70% - Rehab = Offering Price
Ex: 100,000 X 70% - 20,000 = $50,000
The second method I want to talk about is the buy and hold method. This is straight-up buying the rental property and renting it out. There is a rule that most people use, it’s called the 1% rule. What that means is the gross monthly rent should be One percent of the total purchase price. If it is, that will cover most mortgages and insurance while typically put one to three hundred dollars profit in your pocket. So what exactly does that look like if you have a hundred thousand dollar house? The rent should be $1,000 per month. If it is, there's a good likelihood that you're going to be making money. There are other factors that can play into your net profit, like insurance and location. Typically, however, it’s a pretty sound rule.
The third strategy that I want to talk about is the BRRRR strategy and that buys, rehab, rent, refinance, repeat. Basically, it's a hybrid of the Fix and Flip and the Buy and Holds strategies. You're going to buy a property that needs to be rehabbed and you should use that 70% rule we talked about above. ARV X 70% - Rehab = Offering Price. Once you have finished the rehab process, instead of selling you will rent it out. Make sure when you decide the rental rate you are getting the 1% rule. Your ARV is $120,000 you want to try to get $1,200/mn in rent. Once the property is rented out the plan is to Refinance. This is called a Cash-Out Refinance. You're basically putting a mortgage on it, pulling the extra cash out, paying off the loan you used to purchase the property and rolling the cash into another deal.
Crystal and I have completed the BRRRR strategy on two properties with great success. One tip from us: you have to be confident in your ARV estimate. Your refinance and rehab depends on the comps you pulled. The more practice you get with pulling comps and deciding the ARV on the property the better you will become at it. Crystal and I love this strategy and will continue to use this strategy in the years to come.
We hope this was helpful and gives you the confidence to go make your first deal. Drop us a question in the comments below. We will make a video or blog post to answer your question!