Some real estate investors buy properties for immediate repair and resale. Some real estate investors buy properties to rent and ultimately earn a monthly income from their rentals.

When you sell wholesale properties, you can meet both types of investors and in this article I will discuss how to analyze offers from the perspective of a buy, rent and hold investor. By understanding how your offers are viewed, you can better buy your offers and also present your best presentation when trying to sell your offers to these types of investors.

The operating margin

When you take the rent you receive from a property and subtract all expenses except the mortgage payment, the remaining value is the Net Operating Income.

Investors use net operating income (or NOI) to determine how much debt a property can afford and as an indicator of what they can afford to buy a new rental property.

Here’s a quick rundown of an oversimplified deal.

Example

If you have a property that generates $ 1,000 per month in rent and you assume that for 1 month in 20 the property will be vacant, we can subtract a vacant allowance of 5% (1 in 20 months = 5%).

So $ 1,000 per month is really only $ 950 per month when you calculate that for one month out of twenty you will have no income from the property. That’s what the vacancy allowance takes into account.

Now from the $ 950 per month left, we can subtract the rest of the expenses, including administration, maintenance, taxes, insurance, utilities (if owner must pay), and any HOA fees.

In this example, these are our expenses:

• Management: 10%
• Maintenance: $ 50 per month
• Tax: $ 105 per month
• Insurance: $ 50 per month
• Utilities: None – Tenant Country
• HOA: No HOA

So from the $ 950 we subtract $ 95 for administration (that’s 10%), $ 50 for maintenance, $ 105 for taxes, and $ 50 for insurance. This leaves us with $ 650 per month in net operating income (NOI).

So $ 650 per month is the amount of debt, in the form of a monthly payment, that the house can afford to maintain.

If we connect to a financial calculator a payment of $ 650 per month, an interest rate (whatever the current rate … we’ll use 7% here), and a term of 360 months (30-year loan), then We can figure out the amount of money that could be borrowed.

It turns out that when you plug these numbers into a financial calculator, you get $ 97,604.12.

This number is for cash flow equilibrium. What if the investors you have on your wholesale list want to see $ 100 per month in cash flow?

Well, we take the $ 650 per month NOI and subtract $ 100 so they can actually charge $ 100 per month as income. If we redo the calculations with our financial calculator with $ 550 per month, then the most you can afford for the house is $ 82,573.37.

If you want to charge a $ 10,000 wholesale fee to find that deal, then the most you can put that house under contract for is $ 72,573.37 ($ 10,000 less than what your investor buyer would need to buy to get your $ 100 per person). monthly cash flow).

I highly recommend that you run your own examples on dozens of properties so you can see how this calculation works.