Let us know how this advice worked for you Keith...

Hi Keith-
While these are all great answers, they are old school investor answers. Investors in todays market, begin negotiations sometimes at 30-40% on the dollar. Now, it depends on whether or not you can do a lot of the work yourself or whether or not you will have to hire someone to do the work for you. Looks like you intend on hiring someone (construction costs) And, you must keep costs low, which means even if you intend to live there, you must not outprice your market. You MUST BE AWARE of your numbers at all times! AND, in negotiations, you must remove all emotion! If it's a total gut rehab, in other words down to the studs, replacing electrical and plumbing, you never know what you will encounter. So, once you get to the finish work, you may not always have a lot left over. ALWAYS PLAN FOR WORST CASE SCENARIO.

Hope that helps!

It sounds as though you intend to owner occupy, which makes more loan programs & lower down payment available however, you need to really assess the price point for your location. In rehabs, there is a tendancy to over improve properties buyers intend to occupy. When you buy something already up to date, it may be easer to assess it's value relative to surrounding properties. Good luck with your decision.

I like Tino's formula. Here's one used by investors. Note: Investors are looking for immediate profits. Not that they're greedy, but no one knows what'll happen in 3-5 years. So, rather than guessing or speculating, they do their calculations based on today's costs and today's expenses. Note, too, that this formula builds in the Realtor's commission (always negotiable) when selling. And it assumes expensive "hard money" to purchase. Your costs would be less to purchase.

MAO (maximum allowable offer) = (After repair value * 0.70) - Repairs.

So you determine the after repair value of the property--what would it be worth today fixed up? Multiply that by 0.7. Take the result and subtract the rehab costs.

In some areas of Baltimore (an area I know a bit about), where a rowhouse gut costs maybe $80,000, the formula would look like this:

$60,000=($200,000 * 0.7)-$80,000

So, on a property that, fixed up, would be worth $200,000 and that requires $80,000 in rehab, the most an investor would pay would be $60,000.

That formula results in a number pretty close to Tino's--so you can get a sense of what numbers you should be looking at.

Hope that helps.

Keith- the Prices are right for purchasing, however they are also NOT right for selling. Good rull of thumb- Purchase price plus cost to rehab should net you 20% in a quick sale. Selling is tough right now, so if you can purchase plus rehab costs at 20% below and wait 3 years to sell you should be fine as long as you can rent it to cover the monthly costs It will be a good investment.