Investment Formula

Investors want to make as money as possible. In reality, if they make 25% return or better on their investment, they will be happy. In my experience, time isn't as much of a factor as you'd think. For example, if you can generate a 30% ROI (Return on Investment) over 6 months, that's better than 30% over 30 months; however, they will still accept this return.

It's best to calculate a range of ROI from 30% - 50%. If you call an investor and ask for $2 million to purchase a property and renovate it, they will expect somewhere between $2.6 million - $3 million back at the end of the project, whether it'd be 6 months or 18.

Everyday, you have to know 2 types of comps. Real Estate and Construction.  Real Estate comps are the "comparable" prices for finished properties in the neighborhoods you are looking.  A block to block comparison is better than a neighborhood based comparison or a borough based comparison.  For example,  SoHo or Tribeca investments are priced much higher than Brooklyn, Lower East side or Harlem. Always work the comps to be in your favor.  The seller will always work the comps to be in their favor.  Investors will do the same.  Be knowledgeable.

Construction comps are the cost of construction costs per square foot in NYC. There are huge differences for union and non union as well as low end or high end. I will tell you right now, never do low end. Always go big with quality and detail. It pays dividends in the end.

My investors want at least a 30% ROI (Return on Investment) but start at 50% high end ROI. Anything above 50% is unexpected and is a bonus. - and it usually means you mispriced the deal.  Missing an estimate on the high side can be as bad for your credibility as estimating to low of a profit.  It may seem like you were guessing.   Plan for 50%, settle for 30%.

I came up with the following formula after time.  This formula isn't designed to give you the profit, which is traditional in most formulas. This formula is deigned to determine the Acquisition Price. If you can't get the acquisition price, then the deal isn't worth it.  If you can get the acquisition price, you are certain to make a significant profit.  This needs to be black and white for investors.

Selling Price. In New York City, the selling price is going to be the neighborhood comps. Theres not too much you can do to drive up the selling price, even if you do high end fixtures and kitchen. Going high end simply beats out your competitors.  You may be able to go a little higher, but investors i've worked with don't buy into this. They always take the most conservative route.  Ultimately, you need to manifest what the profit will be. If you can't plan for the minimal ROI then don't do the deal.

S = Selling Price
C = Construction cost
A = Acquisition Price (Investment Price)
P1 - Profit at 30%
P2 = Profit at 50%

30% formula:
A= P1(S-C)

50% formula:
A=P2(S-C)