ROI (Return on Investment) to determine good verses bad deal

ROI (Return on Investment) to determine good verses bad deal


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Real estate investing is a numbers game called ROI (Return on Investment) that will determine whether a property is a good or bad deal.  Sometimes an investor wants a certain profit dollar amount to determine a good deal.  Most of the time the ROI (Return on Investment) is 15% or more is a deal maker; then obviously 14.999% or less is a deal breaker.  Here are specific scenarios:

House 418 is in a neighborhood with an ARV (After Repair Value) of $169,900, the renovations have determined to be $12,500, the purchase price is $125,000.  Is this a good or bad deal based on the ROI (Return on Investment)?

Answer is: GOOD!

Also factoring in the holding costs, transaction fees, lender fees, and misc. fees, the total cost of the property is $143,860 divided by the After Repair Value $169,900= 0.8467-1=15.32% for the ROI.  The profit is $26,080.  This is above the 15% minimum with some wiggle room in the profit margin.

This property is a WIN-WIN because the seller was able to pay off existing liens and have extra money in their pocket; Reel Property Solutions, LLC had a quick flip property; the lender had their loan plus interest rate returned within 3 months.

 

Property 214 is a foreclosure in a smaller town.  The ARV could be $189,900, the renovations have been determined to be $111,095, the bank asking price is $89,900.  Is this a good or bad deal based on the ROI (Return on Investment)?

Answer is: BAD!

Again, factor in holding costs, transaction costs, lender fees, misc fees, the total cost of the property is $218,098.  Since the top dollar amount to list for resale is $189,900, this is already looking like a BAD deal!  A deeper look at the numbers:  $218,098 divided by the After Repair Value $189,900= 1.1484-1=   -14.84%.  The profit is approximately NEGATIVE $30,000!  Reel Property Solutions, LLC would have to purchase for maximum $35,000 just to have an ROI of 15.91%.  This property had massive foundation issues, such as the garage floor sank downward about 2 feet plus one wall of the foundation was bowing inward.  Also, there was standing water, mold, kitchen probably had a grease fire, the backyard had a nasty slope right to the house that needed to be smoothed and put up shrubs along the house perimeter to absorb water, and the roof had a tarp over part to indicate there was significant leaking.  In a property with such extensive repairs like this, the profit margin and ROI needs to be substantially larger to accommodate any unknowns that would take a hit to the profit.  For example, with the leaky roof, the repairs would be to tear off the existing roof, new plywood, shingles, etc. but what if the rafters were rotted and the insulation all had to be replaced?  That could be tens of thousands of dollars, so a solid inspection to be done first then a big contingency percentage built into the cost of repairs.  Too many unknowns, so Reel Property Solutions, LLC did not make an offer.

 

Sometimes a property has a huge profit potential with a small ROI (Return on Investment).  What to do when this happens?  Here is an example of property 1207 with an ARV of $575,000.  Purchase price is $380,000, repairs $93,575, misc. and holding costs $54,631= $528,206 which is approximately 8.13% ROI (Return on Investment) with a profit of $46,794.  In this instance, the property needed a new roof, lots of cosmetic work due to excessive wall paper to be torn down and replace a deck.  The structure was very sound; therefore, the risk was low.  An investor would have to determine for themselves if this is a good deal or bad deal.  If an investor was determined to have the 15+% ROI (Return on Investment), the purchase price would have to be $350,000 with a ROI (Return on Investment) of 15.36% and profit of $76,539.

 

Calculating all these figures is easy with the documents from our real estate investing courses with Fortune Builders.  Also, just experience in knowing what our remodeling contractor will or will not touch for rehabs helps to justify the costs.  Our remodeling contractor is very leery of houses with a limestone foundation- or any foundation issues in general.  Reel Property Solutions, LLC also has a network of other investors to do a wholesale which was attempted for the 1207 property, but unfortunately did not happen.

Reel Property Solutions, LLC goes by the 15% ROI (Return on Investment) plus a minimum of $25,000 profit.  The ROI (Return on Investment) can have wiggle room as long as the profit is met.

Also, for further information regarding key items to think about when investing in real estate, look through this website: www.openlistings.com and check out https://www.openlistings.com/blog/buying-an-investment-property-heres-what-you-should-consider/.  This is another eye opening article that focuses more on the underlying points of real estate investing.

Reel Property Solutions, LLC is always seeking business partners for Joint Ventures, money lenders, remodeling contractors/sub-contractors, and anyone else who would benefit from us and us from you.  Please contact us to find out how we can renovate houses into magnificent homes!  CATCH A WINNER!

 

info@reelpropertysolutionsllc.com 507-722-1511 OR 507-218-8788

 

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