Many beginners in real estate investment go to meeting or some sort of informal training. There always a couple of terms that come to surfice
ARV ( After Repair Value )
ARV is the value of the selected property assuming it is all fixed up. Luckily you or your realtor will know how to do a CMS and we can get the ARV using a CMS. ( Note a CMS is not an appraisal).
MAO: The 70% Rule
Many investors ( mostly flippers of properties) use the 70% rule to calculate the MAO or maximum allowable offer. Simply put, the 70% rule states you should never pay a house more than 70% of its ARV minus the repairs needed.
The formula is
MAO = ARV * 70% – cost of repairs – Closing Costs – General Owning Costs
Lets apply the rule above to an example,
The house we are examining needs extensive renovation. It is listed at $120k has a ARV of $200k
Owning costs ( insurance, taxes, expenses paid during renovation )
140,000 * 70% = 98,000
Is you MAO at 70%
I the DC area the 70% rule is difficult to achieve – Another way to calculate your MAO is
MAO = ARV- Rehab Costs – Holding Costs – Purchase cost – Selling Cost – Desired Income
Do we care as realtors ? Well if any of your client receive a “I buy your house for cash” note
So we start from the selling price of the Home once fixed or updated and deduct our Costs and Profit
What do you use if you really do not like math ?
The 1% Rule:Rental property should be able to rent for 1% of their cost per month. For example, a $200,000 property should be able to rent for $2,000 per month. This deals are very hard to find in the DC area but not impossible.
So lets BRRRR ( terminology used by investors for Buy Rehab Rent Refinance Repeat ). It is term that catched on only recently