15% rule Archives - Hard Money Mike

As an investor, you should know what your lender is looking for when they’re looking for a good real estate investment.

Recently, we discussed the 15% rule and why that 70–75% ARV is so important to ensure a profit on your deals.

We want to make sure you’re prepared for all the ins and outs of real estate investing so you’re not surprised by any fees or payments.

Part of that is understanding what a good deal looks like from the lender’s perspective.

What is Your Lender Looking For?

When we look at deals, we’re looking to fund 70–75% of the ARV. The final 25–30% are taken up with your profits, closing costs, and other fees.

However, when determining our numbers, there are three things we look at:

Purchase Price
Selling Price (ARV)
Rehab Costs

These three elements and the way the numbers balance between them tell us a lot about a property and an investor.

If an investor is looking for an ARV of $200,000, then we’re going to look at the moving pieces under the rehab proposal to make sure that’s a reasonable ask.

Additionally, a $200,000 market is very different from a $1M market, and your lender wants to make sure all the numbers and features of the property line up for the target market.

As lenders, we also want to know that you understand the relationship between how much you’re going to need, how much we’ll lend, and how much you’ll sell for. Understanding all of this is critical if you want to be profitable.

Returning to our example, here’s where the numbers stand:

Purchase Price
Selling Price (ARV): $200,000
Rehab Costs: $30,000

75% of the ARV would be $150,000, the maximum loan most lenders will offer.

When your lender looks at a deal like the one above, we want to see a purchase price of no more than $120,000. Combined with the rehab costs, that maxes out that $150,000 loan. Any higher than that, and it will be very difficult for you as an investor to turn a profit.

An unprofitable deal for an investor is a risky deal for a lender.

Of course you could dip into your profit margin and spend more. However, protecting that 15% is what lets you keep going in the real estate game.

So What’s a Good Real Estate Investment?

A good deal is one where you put all these numbers together and prove that you’re going to make a profit.

Show your lender that you understand what it takes to bring this property up to the market conditions required for your ARV.

Especially if you’re a new investor, don’t feel pressured to take risks. It’s always better to do fewer deals if that’s what it takes to protect your profit margins.

Where We Come In…

We understand that numbers sometimes get confusing. But that’s why we’re here. We’re always happy to run through these numbers so that you understand your project before approaching a lender.

We also have free resources that can help you learn more about your investment options.

If you have any questions, reach out to us at Info@HardMoneyMike.com or fill out a contact card.

Happy investing!

Over the next few weeks, learn more about real estate investing for beginners. Today we’re looking at the 15% rule…

How can you tell if a deal is “good” or not?

Here at Hard Money Mike, we have a few ‘rules’ that help you make those tough decisions. Not only do these guidelines help you make money as an investor, but they also make you more attractive to lenders.

So what does a good deal look like?

1. Profit

It all starts and ends with profit.

Every deal should have a minimum of 10% profit for you. However, as a rule, it’s best to aim for 15% of the ARV. This means that the selling price is a minimum of 10%–15% higher than the ARV (After Repair Value).

For example, if the estimated ARV for a property is $200K, you should look for deals that will get you about $30K in profits.

You’ll need to keep in mind other final costs to make sure that 10%–15% actually ends up in your pocket.

2. Cost to Sell

How much is it going to cost to sell the property? Typically, you see costs somewhere between 4%–6%.

Part of that is real estate cost, but hopefully you find a good deal with an agent. You’ll also need to factor in closing costs.

3. Cost to Fund

Leverage costs money. Loans come with interest, and you’ll be using the incoming money from your deals to pay those off.

Typically, you can estimate that your money costs 5%–6% more than the amount of the loan itself.

What do All These Numbers Mean?

When we add together these estimates, we end up with a range:

19%–27% of the cost of your project will not be funded by any of your loans. These costs all come out at the end, but it’s very important that you don’t wait until the end to think about them.

Typically, lenders look to give you 70%–75% of the estimated ARV of the property. Lenders do this because they want to make sure you have accounted for all these other numbers.

You need to know your profits, what it’s going to cost to sell, and the cost of your money. None of these numbers are financed into your loan so they’ll need to come 1) out of the sale, or 2) out of your pocket.

The Lender’s Perspective

Lenders want you to demonstrate that you understand the costs. If you can show that you have a plan to cover these final costs, lenders are typically fairly comfortable covering between 70% and 75% of the ARV.

You may find hard money loans willing to go higher, but if you’re looking at traditional loans, expect 70%–75%.

If you have the funds in your money bucket, the lower the loan, the higher your profits (and the easier it is to get that 15%!). Anything above 75% and it gets trickier for you to make money on a deal because you’re needing to focus so much of your money on paying back lenders.

Diving Deeper

Over the next few weeks, you can stay tuned on our website or check out our YouTube channel where we’ll be going over more tips on real estate investing for beginners.

Real estate is an investing game. It’s a numbers game. If you have some numbers you want to run by us, just reach out to Info@HardMoneyMike.com or fill out a contact card.

Our goal is to equip you with the tools and knowledge to help you successfully build wealth.