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MAO Formula:
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The Maximum Allowable Offer (MAO) calculation is a real estate investing formula used to determine the highest price an investor should pay for a property while still achieving their desired profit margin. The formula accounts for the after-repair value, repair costs, and mortgage expenses.
The calculator uses the MAO formula:
Where:
Explanation: The formula calculates the maximum offer price by taking 70% of the after-repair value and subtracting both repair costs and mortgage expenses to ensure a profitable investment.
Details: Accurate MAO calculation is crucial for real estate investors to avoid overpaying for properties, ensure profitable investments, and maintain healthy cash flow in their investment portfolio.
Tips: Enter the estimated after-repair value in dollars, the total repair costs in dollars, and the mortgage amount in dollars. All values must be non-negative numbers.
Q1: Why use 70% of ARV in the formula?
A: The 70% rule is a common real estate investing guideline that accounts for profit margin, holding costs, and unexpected expenses while ensuring a profitable flip.
Q2: What if my repair estimates are inaccurate?
A: Always add a contingency buffer (typically 10-20%) to your repair estimates to account for unexpected issues that may arise during renovations.
Q3: Should I include all mortgage costs?
A: Yes, include all mortgage-related expenses including principal, interest, and any associated loan fees to get an accurate MAO calculation.
Q4: How does MAO differ from traditional home valuation?
A: MAO is specifically designed for real estate investors focused on fix-and-flip or rental properties, considering repair costs and profit margins rather than just comparable sales.
Q5: Can I use this formula for rental properties?
A: While primarily used for flips, the MAO formula can be adapted for rental properties by adjusting the percentage multiplier based on your desired cash flow and return on investment.