Property Flip or Hold – Value Analysis
When purchasing a home for investment with the intent to Flip or Hold you need to consider the Value Analysis of the property. In Real Estate Investment you make your profit when you purchase, yep I said it again 🙂
The end result will tell us based on ARV (After Repair Value) – Purchase Price – Purchase Closing Cost – Expenses to Rehab – Mortgages what our approximate Equity will be at closing. A very general way to describe your Equity is your profit made at closing. The actual definition is a homeowner’s financial interest in the property by taking Market Value – Mortgages – Other Liens.
- ARV – The ARV (After Repair Value) is calculated by looking at sold homes in the area that are comparable to your property. In our case it will be $192,500.
- Purchase Price – This is the price you will pay for purchasing the property which will be $52,500. In previous post I spoke about how to calculate the M.P.P. (Maximum Purchase Price or Best Offer). You can read it here.
- Repairs – We need to estimate how much it will cost to repair (Rehab) the property which in this case is high at $70,000.
- Holding Cost Mo. – It’s very important not to forget about your Monthly Holding Cost while repairing the home and this number is not the actual Repairs. Some examples are the cost of having services turned on like electricity, water, possible HOA (Home Owner’s Association) and son on. In our case it will cost us monthly $130.
- Taxes Yearly – The Taxes for the property will be $1,620 yearly. Keep in mind if the property is currently taxed with Home Owner’s Exemption once an Investor purchases the Taxes will go up next year cycle.
- Insurance Yearly – The property Insurance will be $900 yearly. Something I have done in order to get the insurance premium lower was to insure for less than 100% (80%) of the value, sometimes the Insurance Company over estimates replacement value. Be very careful not to under insure a property.
- Flip Mortgage Terms – If you obtain a Mortgage just for the duration of the Flip then we need to enter this information. In our case this was a cash deal but in most Flips it’s a great idea to leverage your cash with a short term Mortgage either by a Lender, Private Money or Hard Money.
- Rent Mortgage Terms – For the Rental comparison, once the Repairs are done we will most likely obtain a Mortgage to take our investment out for leverage. Hint, once you Refinance you can use that money to purchase more properties… In our case we it will be a 360 months, 5.5% Interest and a Loan Amount of $80,000.
- Sales Price – This is the actual Final Sales Price (or best estimate at this point of the decision process) that the home will sell for. In our case it’s $180,000. It’s not necessarily always the same as the ARV. Could be more or less.
- Equity – This is the what I always say, you make your profit when you purchase and in our case it will be $69,870. How did we arrive at this number? We take the ARV – Purchase Price – Purchase Closing Cost – Repairs – Flip Mortgage Amount. Let’s calculate our profit, $192,500 – $52,500 – $1,050 – $70,000 – $0 (no mortgage cash deal) = $68,950.
It’s time to put it all together and see what our Equity will be.
|Purchase Closing Cost 2%||$1,050|
|Holding Cost Mo.||$130|
|Flip Mortgage Term Mo. 0|
|Int 0% Loan Amount||$0|
|Rent Mortgage Term Mo. 360|
|Int 5.5% Loan Amount||$80,000|
Property Flip or Hold