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