I am very analytical when it comes to real estate investing. As such, I use several formulas to ensure that I am making rational decisions. You cannot base all of your decisions on formulas. However, formulas do provide a stable method for ensuring that you do not veer too far off of you investing path.

I have already posted about the Rent Multiplier formula, which is the driving formula I use for buying investment rental properties. Another formula I use is what I call the **Nickerson Formula**. This derives from a book by William Nickerson entitled “How I Turned $1,000 into Three Million in Real Estate in My Spare Time”, which was published over 40 years ago.

While some parts of this book are outdated, it still presents a basic approach that should work well in today’s market. Nickerson’s approach was basically to make $2 in profit for every $1 spent on repairs. I do not use this formula for setting a purchase price. Intead, I use it to ensure that I get a better deal on properties that require more work. If the repair costs are higher there will be more work and risk involved in the deal, so I need to pay less for the property.

The basic formula is:

ARV = PurchasePrice + (2 X RepairCost), *where ARV = After Repaired Value*.

In order to determine the maximum purchase price you must first estimate the **RepairCost**. Then subtract twice the repair cost from the **ARV** to get the maximum **PurchasePrice**. This formula is:

PurchasePrice = ARV – (2 X RepairCost).

Assume you are presented with 2 options.

1. A house with an ARV of $100,000 that needs $5,000 in repairs and you can purchase if for $70,000.

2. A house with an ARV of $100,000 that needs $30,000 in repairs and you can purchase it for $45,000.

In both cases, you will have invested $75,000 for a house worth $100,000. Which is the better deal?

Let’s try the Nickerson Formula on both.

*Option 1*

PurchasePrice = ARV – (2 X RepairCost).�

PurchasePrice = 100,000 – (2 X $5,000).�

PurchasePrice = 100,000 – ($10,000).�

PurchasePrice = $90,000

*Option 2*

PurchasePrice = ARV – (2 X RepairCost).�

PurchasePrice = 100,000 – (2 X $30,000).�

PurchasePrice = 100,000 – ($60,000).�

PurchasePrice = $40,000

This formula shows that the maximum I would pay for option 1 would be $90,000 and the maximum for option 2 is $40,000. With option 1 I am actually buying at $70,000; $10,000 under the maximum. With option 2 I am paying more than the maximum. Using this formula I see that option 1 is the best deal.

Please keep in mind that I do not use this formula alone to get the maximum purchase price. (I want to gain equity from the purchase as well as the repairs.) I use other methods, such as the Rent Multiplier, to arrive at the purchase price. Then I make sure that number also meets the requirements of this formula. This acts as a safety net to ensure that I get a better deal if a lot of work is required on the property.