A Complete Guide to Underwriting a Philadelphia Single-Family Home Deal

Publication note: The figures in this guide are underwriting estimates based on RJ Homes' experience and market information available in August 2026. Fees, taxes, lender terms, rents, construction pricing, and market conditions change. Verify every assumption for the specific property and transaction.

This educational series will break down how we at RJ Homes evaluate and underwrite different real estate asset classes and prospective deals. My goal is to provide practical information that would have helped me avoid several costly mistakes when I was starting out. Underwriting and buying correctly are foundational to real estate investing — there is a reason the phrase "you make money when you buy" has lasted. This first guide shows exactly how I think when a Philadelphia single-family home deal comes across my desk.

We will begin with the four cost categories in my underwriting model: buyer-side closing costs, construction costs, holding costs, and sale or refinance costs. Then we will estimate the property's after-repair value (ARV), choose an exit strategy, and work backward to a defensible offer price. Finally, I will apply the model twice: first to a hypothetical flip, then to a real Philadelphia rental opportunity that we evaluated in August 2026 while the property was available on the market.

1. Understand Every Cost Before You Estimate Value

Many investors are taught to estimate a property's after-repair value (ARV) and then work backward. That is the correct order for the calculation, but it is not the correct order for learning the process. If you cannot identify your true costs, the ARV is just a number being fed into a formula. That is one reason so many deals marketed on and off the MLS are traps rather than opportunities: the seller, agent, wholesaler, or buyer may not fully understand what it will cost to execute the project.

I separate those costs into four categories:

• Buyer-side closing costs
• Construction costs
• Holding costs
• Sale or refinance costs

Buyer-Side Closing Costs

Start with the costs of acquiring the property. I model them under two scenarios: a cash purchase and a purchase using a loan. Because this guide focuses specifically on Philadelphia, the fees below reflect this jurisdiction and should be verified before each closing.

The Philadelphia-specific costs below are the starting point for the model.

Cash purchases

If you buy in cash, budget for the following:

• Realty transfer tax
• Title-company charges
• Title insurance
• Recording, conveyancing, and other miscellaneous costs

Philadelphia's current realty transfer tax is 4.578% of the applicable value. In a typical arm's-length transaction, buyer and seller often split that cost, although the contract controls. A 50/50 split equals 2.289% for the buyer. If you are buying through a wholesaler or assignment, confirm in writing whether you are paying half or the full amount.

Title-company charges may include document preparation, wire, certification-reimbursement, and related settlement fees. Based on our transactions, I generally budget $200–$600, depending on the provider and file.

Title insurance protects the buyer against covered title defects that were not resolved before closing, such as certain liens, utility balances, or judgments. We have had multiple situations in which the policy saved us thousands of dollars. For quick underwriting, I budget approximately 1% of the purchase price. Actual premiums follow filed Pennsylvania rates and may vary with the transaction, endorsements, and policy amount; ancillary title charges can also differ.

The remaining items include government recording charges, conveyancing fees, and bank wire fees. Philadelphia currently charges $278.75 to record a standard deed. A conveyancer commonly costs us $300–$500 when one is involved, and bank wires often cost $15–$35. I therefore use $700 as a practical miscellaneous-cost allowance per cash transaction.

For a cash purchase, my quick underwriting assumptions are:

• Realty transfer tax: 2.289% of purchase price when split equally; confirm the contract
• Title-company charges: $200–$600 per transaction
• Title insurance: approximately 1% of purchase price for quick underwriting
• Recording, conveyancing, and miscellaneous costs: $700 per transaction

Purchases using hard-money financing

If you use a hard-money lender, all of the cash-purchase costs still apply, and lender charges are added on top. Fee structures differ across lenders and may also vary with leverage, experience, credit, and the specific project. The following ranges reflect what I most commonly see in the market.

I group those lender charges into four categories:

• Origination fee (points)
• Processing and document-preparation fees
• Appraisal fee
• Other lender charges

Lenders often call the origination charge "points." It is the fee for making the loan and is typically calculated as a percentage of the total loan amount, including any financed construction budget. I most often see 1%–2%. Higher leverage can increase both the dollars paid and, in some cases, the rate or points charged.

Processing and document-preparation fees may be separated or grouped under another name. I usually see $1,000–$2,000, with roughly $1,500 as a common midpoint.

The lender will usually order an appraisal to test whether the proposed ARV and collateral support the loan. The borrower pays for it. I generally budget $500–$700.

The final category is lender-specific miscellaneous charges: wire fees, underwriting charges, added document fees, and similar items. Review the term sheet carefully and ask whether duplicative fees can be removed. If they remain, I budget up to another $500.

For a financed acquisition, my quick lender-fee assumptions are:

• Origination fee: 1%–2% of the total loan amount, including any financed construction budget
• Processing and document-preparation fees: $1,000–$2,000; use $1,500 as a midpoint
• Appraisal fee: $500–$700; use $700 for a conservative budget
• Other lender charges: up to $500 if they cannot be removed

One final warning: when using a lender, include both sets of costs — the standard acquisition expenses and the lender's fees. Leaving either side out understates the cash required to close.

Construction Costs

Construction is the cost category investors most often underestimate. Miss this number and the entire project can derail.

Every project is different, so I begin with a fast, back-of-the-envelope estimate and then replace it with a property-specific scope of work before making a final commitment.

Your true construction cost depends on how you operate. If I hire each trade directly and act as my own general contractor or project manager, my cost may be substantially lower than that of an investor who hires a third-party GC to manage the project. The numbers below reflect our operating model and our own experience; they are not universal contractor pricing.

I used to divide Philadelphia rehabs into three categories. In practice, I now use two because a genuine "moderate" rehab is surprisingly rare in the older housing stock we buy. My first-pass estimates are:

• Full-gut renovation: $95 per square foot when we manage the trades
• Partial or cosmetic renovation: approximately $45,000–$50,000

For a 1,200-square-foot, three-bedroom Philadelphia interior rowhome that needs everything, $95 per square foot produces a working budget of $114,000. In round numbers, I would expect roughly $110,000–$115,000 when managing and subcontracting the work myself.

If the home has newer plumbing and electrical systems, a functioning HVAC system with existing ductwork, and walls that can largely remain except around the kitchen and bathrooms, I may use a rough $45,000–$50,000 budget for a house of 1,500 square feet or less.

These are intentionally broad estimates, not a substitute for a full scope of work. A future article in this series will break rehab costs down by trade — framing, plumbing, electrical, roofing, finishes, and more. That analysis deserves its own guide.

These categories are specific to Philadelphia single-family homes and to the way we operate. Other investors may disagree with both the categories and the costs. My reasoning is simple: when a house is roughly 100 years old and has decades of deferred maintenance, saving existing systems and finishes can be harder than it appears. Earlier in my career, I often underwrote these homes as "moderate" rehabs, only to encounter major overruns. I no longer analyze them that way, and our margins have improved.

By estimating scopes and budgets conservatively, we create room for the conditions that reveal themselves after demolition. That protects the project, reduces conflict with subcontractors, and improves the odds of preserving the expected margin.

In short: if a house appears to need everything, I start at $95 per square foot when we will manage the trades ourselves. If a third-party GC will run the project, I would advise increasing that preliminary estimate to at least $100–$105 per square foot, maybe more.

If the home was renovated within the last five to ten years, the utilities are serviceable, and the improvements are truly reusable, I may start closer to a $45,000–$50,000 total renovation budget.

Holding Costs

Holding costs vary by capital structure and timeline. Whether you buy with cash, borrow from a bank or hard-money lender, use private capital, or fund construction yourself, you need to model the expenses that accrue before the sale or refinance. Underestimating them can erase the margin just as quickly as missing the rehab budget.

For a cash purchase, the recurring holding-cost categories are relatively straightforward:

• Utilities: water, electricity, and gas
• Property taxes
• Insurance

If any part of the project is financed — through a bank, hard-money lender, HELOC, or interest-bearing private capital — include the interest expense in the rehab model.

Time drives every holding-cost category. The longer you own the property before a sale or refinance, the more interest, taxes, insurance, and utilities accumulate. Faster execution lowers the cost; delays compound it.

Most bridge debt (i.e. hard money) is interest-only, often with a term of 12 months or less. Rates commonly fall somewhere around 9%–12%, although the market and borrower profile matter. For a conservative monthly estimate, multiply the outstanding loan balance by the annual rate and divide by 12. Some lenders charge interest only on construction funds after they are drawn, so use the actual loan documents when available.

Assume you can buy a 1,000-square-foot Philadelphia property for $80,000 and estimate a full-gut rehab at $95,000. If a lender finances much of both the purchase and construction, the loan might be roughly $160,000–$170,000, depending on its loan-to-cost limit. At a $160,000 balance and a 10% annual rate, the conservative full-balance interest estimate is $16,000 per year, or $1,333 per month.

If annual property taxes are $1,200, the monthly tax accrual is $100.

For a property of this type, our insurance might run roughly $80–$100 per month; I use $100 in the example.

For utilities, we commonly reserve $500–$1,000 over the life of the project. To stay conservative, this example uses $1,000.

The remaining variable is the timeline. A seasoned operator with a familiar construction team, working knowledge of Philadelphia permitting, and reliable material ordering may complete a full-gut project in approximately four months. A newer investor should build in more time.

If the property will be sold, add the listing and closing period. Recent citywide data shows Philadelphia homes taking roughly 47 days to sell on average, but property type, condition, price, and neighborhood can differ materially. For underwriting, I would still allow two to three months from listing through closing.

If the property will be rented, our lease-up averages approximately 24–30 days when we cannot pre-lease during construction. Our existing lenders can sometimes complete a refinance in under 30 days, but I would budget five to six weeks with a new lender or when title work must be repeated. In practice, I allow roughly two to two and a half months for lease-up and refinance.

Combining acquisition, construction, and the capital event, I use six months as a typical full-gut timeline. A cosmetic rehab may take about one month on the construction side and can materially shorten the total hold.

Returning to the example, assume the $80,000 property requires a full gut and is held for six months. The holding-cost estimate becomes:

• Utilities: $1,000 over the project
• Taxes: $100 × 6 months = $600
• Insurance: $100 × 6 months = $600
• Interest: $1,333 × 6 months = $8,000

Total: $10,200

I also place certain fixed, project-level expenses in the holding-cost bucket for underwriting convenience, even though they do not all accrue monthly.

For a rental, those costs can include the rental license, lead-safe or lead-free certification, wire fees between operating accounts, and legal or entity-formation work. Rental-license and lead-certification costs alone can exceed $300, and legal or banking items can push the miscellaneous total to $500–$1,000.

For that reason, I add at least a $500 miscellaneous reserve to every project.

Sale or Refinance Costs

Once construction is complete and a tenant or buyer is identified, the project reaches its exit: either sell the property or stabilize and refinance it. The chosen exit strategy changes the cost structure, so it must be defined before the offer is made.

If you sell the property

For a flip, model the costs of selling the property just as carefully as the costs of buying it.

There are three basic costs associated with selling a property. They can be broken down as follows:

• Brokerage compensation
• Realty transfer tax
• Title and miscellaneous charges

The first category is brokerage compensation. There is no standard commission: compensation is negotiable and set by the applicable agreements. For underwriting our own flips, I often model total brokerage compensation at 5% of gross sale price as a conservative project assumption. That is our budgeting choice, not a required or industry-set rate.

We often choose to make seller-funded buyer-agent compensation available on our flips because, in our experience, it can reduce a buyer's out-of-pocket burden and support broader market exposure. The amount and structure depend on the transaction and are negotiated. Investors should model the specific listing and buyer-broker arrangements they expect to use rather than assume any fixed split.

The second category is transfer tax. If the contract divides Philadelphia's current 4.578% total tax equally, the seller's share is 2.289% of the gross sale price. On a $300,000 sale, that equals approximately $6,867.

Finally, budget for seller-side title and miscellaneous charges such as document preparation, wires, overnight delivery, and conveyancing. I generally use $200–$600, depending on the title company and transaction.

Summarizing these categories, you can expect to pay the following in sale-side fees:

• Brokerage compensation: 5% of gross sale price for this underwriting model; actual compensation is negotiated
• Realty transfer tax: 2.289% of gross sale price when split equally
• Title and miscellaneous charges: $200–$600

Title will also identify items that must be paid from the sale proceeds, including certain utility balances, liens, judgments, mortgages, or other obligations. If the property and owner are current and no additional payoff is required, the three categories above are a reasonable base estimate.

If you refinance the property

The second exit is a cash-out refinance: a new mortgage secured by the completed property. The lender advances loan proceeds against the appraised value, subject to its underwriting requirements.

Lenders commonly cap proceeds at a percentage of appraised value. If a property appraises for $300,000 and the lender permits 75% loan-to-value (LTV), the gross loan amount is $225,000. The cash actually available to the borrower will be lower after closing costs and any existing liens or project debt are paid off.

A refinance also creates lender and settlement fees, commonly including:

• Loan Origination Fee
• Appraisal Fee
• Processing, Underwriting, Document-preparation, tax-certificate, and similar charges
• Title, settlement, recording, and lender-policy charges

The origination fee is commonly 1%–2% of the loan amount, although each lender sets its own pricing.

The appraisal supports the lender's collateral and value analysis, and the borrower generally pays the fee.

Miscellaneous lender charges vary, but I commonly see a combined package of roughly $750–$1,500.

Many lenders also require fresh title work and a lender's title-insurance policy before funding the refinance. Do not assume prior title work will be accepted simply because the property was recently acquired or has no recorded mortgage.

A refinance does not trigger the same transfer tax as a sale, but title-search, settlement, recording, and lender-policy charges may still apply. In limited cases, a lender may streamline or waive duplicate work. Budget for it unless the lender and title company confirm otherwise.

My preliminary refinance-cost assumptions are:

• Loan origination: 1%–2% of the total loan amount
• Appraisal: $500–$700
• Other lender charges: $750–$1,500
• Title and settlement charges:
  • Lender's title-insurance policy: approximately 1% of the loan amount for quick underwriting; verify the quote
  • Other title and settlement charges: $250–$500

Profit Targets

If the exit strategy is a sale, the model also needs a target profit. The amount is subjective, but the project is not worth doing merely because the spreadsheet reaches zero. Investors are committing capital, taking execution risk, and creating a demanding job for the duration of the project.

Suppose an investor funds a $300,000 flip entirely out of pocket and earns $20,000. That is a 6.67% total return before annualization; the annualized return depends on how long the capital is deployed. A lower-risk cash account might offer a smaller return with almost no operational work, while public equities have historically produced higher long-term average returns but with market risk and volatility. For a fully self-funded project, my internal target is profit equal to at least 18% of the cash invested. On $300,000, that target is $54,000. A seller may view that as aggressive, but the return must compensate the investor for capital at risk, execution risk, and months of active work.

An investor using hard money or another form of leverage may accept a lower dollar profit because less personal cash is tied up. Some investors use a minimum target such as $30,000 per flip, with anything above it treated as upside.

Most of our projects use some leverage through HELOCs, private capital, or hard money. For a quick first pass on a flip, I often model a target profit equal to approximately 15% of gross sale price, then test the resulting return on invested cash and the risks of the specific project.

2. Estimate After-Repair Value (ARV)

Now return to the calculation order: estimate what the property should be worth after renovation, then work backward to the offer price. Because the cost model is already built, we can evaluate ARV without ignoring the expenses required to create it.

Comparable-sale rules vary by market. In Philadelphia, a property one mile away may be in a different neighborhood and price environment. In Upper Bucks County, where I am based, the nearest genuinely comparable homes may be more than a mile apart. Use rules that fit the market rather than applying one radius everywhere.

To estimate value, identify recent closed sales near the subject that match its property type, style, size, bedroom and bathroom count, and expected condition at completion. A common starting point is at least three comparables. Their sale prices help establish a range for the expected sale price or refinance appraisal, but a strong analysis also reconciles meaningful differences rather than blindly averaging them.

These are my general Philadelphia rules of thumb for selecting comparables and estimating ARV:

• Search within approximately 0.25 mile of the subject property whenever credible nearby sales are available.
  • Philadelphia is highly block-by-block. A comp that is too far away may reflect a different price environment.
• Match the property type and style.
  • For an interior rowhome, prioritize other interior rowhomes rather than detached homes, twins, or end rows.
  • Match the number of stories. Two- and three-story rowhomes can trade very differently.
• Keep gross living area within roughly 250–300 square feet of the subject.
  • For a 1,000-square-foot subject, I would generally search around 900–1,250 square feet rather than use a 1,800-square-foot comp.
• Use similar bedroom and bathroom counts.
  • For a three-bedroom subject, prioritize two- and three-bedroom comps. A four-bedroom sale may be usable when the size and layout are otherwise very similar.
  • Avoid a comp with 3.5 bathrooms when the subject will have only 1–1.5 bathrooms unless the difference can be credibly adjusted.
• Match the expected finish level at exit.
  • Do not use distressed-condition sales to value a fully renovated finished product.
  • For a high-end flip with upgraded utilities, use comparables with similar finishes and systems.
  • For a rental-grade renovation, use comparables with a similar level of finish rather than the most expensive retail flips.
• Prefer sales from the preceding six months; extend to 12 months only when necessary.
  • For a flip, I strongly prefer comparables that sold within the preceding six months.
  • For a refinance, a sale from the preceding 12 months may still be useful, although more recent is better.

After selecting at least three credible comparables, use their sale prices to establish a range. A simple average can be useful for a first-pass estimate; final underwriting should account for the strongest and weakest comps and any material differences in size, condition, layout, or amenities.

Once the ARV is established conservatively, work backward to the maximum offer.

3. Apply the Model: A Hypothetical Flip

To show the formula in action, I'll start with a hypothetical deal. This first example is not an actual listing.

Assumptions

• Asking price: $125,000; annual property taxes: $1,200
• Property: three-bedroom, one-bathroom, 1,000-square-foot Philadelphia interior rowhome
• Scope: full rehab; add a second full bathroom, retain three bedrooms, install forced-air heat and central air, upgrade the other utilities and roof, and leave the basement unfinished
• Capital structure: cash purchase and out-of-pocket renovation, with no lender fees in the model
• Exit: sell the property rather than refinance it
• Timeline: approximately six months end-to-end

Step 1: Estimate ARV

Search for recent sales within roughly 0.25 mile that closed in the last six months and reflect the completed condition of the proposed flip. Assume the following three comparables are the best available:

• Comparable 1 — $305,000 sale; three bedrooms, two bathrooms; excellent condition; upgraded utilities; unfinished basement
• Comparable 2 — $295,000 sale; three bedrooms, 1.5 bathrooms; good condition; upgraded utilities; finished basement
• Comparable 3 — $302,500 sale; three bedrooms, two bathrooms; excellent condition; upgraded utilities; unfinished basement

The three sales average $300,833. For simplicity, use a $300,000 ARV. In a live deal, I would also reconcile the finished basement, bathroom count, utility package, size, and condition rather than rely on the average alone.

Step 2: Estimate Costs

Because the property requires a full renovation and the ARV is established, estimate each cost category. This example assumes a cash purchase, an out-of-pocket renovation, a six-month hold, and a sale rather than a refinance.

Buyer-side closing costs at a $125,000 purchase price

• Realty transfer tax: 2.289% × $125,000 = $2,861
• Title-company charges: $200
• Title insurance: 1% × $125,000 = $1,250
• Recording, conveyancing, and miscellaneous costs: $700
• Buyer-side closing-cost total: approximately $5,011

Note: If the negotiated purchase price changes, the transfer-tax and title-insurance estimates will also change. Recalculate them before finalizing the offer.

Construction: $95 per square foot, assuming I manage and subcontract the project

• Size: 1,000 square feet
• Construction total: $95,000

Holding and miscellaneous costs

• Utilities: $1,000 over the project
• Taxes: $1,200 / 12 × 6 months = $600
• Insurance: $100 × 6 months = $600
• Interest: not applicable; the project is funded in cash
• Holding-cost total: $2,200

Sale costs at a $300,000 exit price

• Brokerage compensation: 5% × $300,000 = $15,000
• Realty transfer tax: 2.289% × $300,000 = $6,867
• Title and miscellaneous charges: $200
• Sale-cost total: $22,067

Target profit for the simplified example

• Target: 18% of the projected $300,000 sale price = $54,000
• Target-profit total: $54,000

Step 3: Calculate the Maximum Offer

With the ARV, costs, and target profit established, the maximum offer is straightforward.

Using the current 2.289% assumed buyer transfer-tax share, the four cost categories total approximately $124,278.

The target profit is $54,000.

The formula is:

Maximum offer = ARV − project costs − target profit
Maximum offer = $300,000 − $124,278 − $54,000
Maximum offer = $121,722

Rounded maximum offer: approximately $121,700

With an asking price of $125,000, I would contact the agent, wholesaler, or seller and offer no more than roughly $121,700 — but only after seeing the property and confirming the scope, structural condition, title considerations, and other red flags. If the assumptions hold, an offer near $121,000 or below would meet this model.

4. Apply the Model: A Real Philadelphia Rental Example

Now apply the same framework to a real opportunity we evaluated in August 2026. Because our primary Philadelphia strategy is to renovate, rent, and refinance rather than flip, this example also tests rent, leverage, and coverage.

The subject is 741 N. 38th Street, an MLS-listed property that readers can review alongside this analysis.

Subject property

• Asking price: $109,000
• Property: three-bedroom, one-bathroom interior rowhome in Belmont, West Philadelphia, where we already invest
• Size: 1,098 square feet
• Condition: full-gut rehab; the interior appears substantially cleaned out

Comparable sales

Because the plan is to rent and refinance the property, I begin with comparable sales from the preceding 12 months. For a flip, I strongly prefer sales from the preceding six months. The three first-pass comps are:

• 4001 Ogden St. — $218,000 sale; three bedrooms, 1.5 bathrooms; fair condition; no central air; unfinished basement
• 3847 Melon St. — $215,000 sale; three bedrooms, 1.5 bathrooms; excellent condition; upgraded utilities; unfinished basement
• 3832 Pennsgrove St. — $229,000 sale; two bedrooms, one bathroom; excellent condition; upgraded utilities; unfinished basement

The three sale prices average $220,667, which I round to a $220,000 ARV. As noted above, a final analysis should reconcile the differences in bedroom count, bathroom count, basement, utilities, size, and finish quality. A separate article in this series will go deeper into appraisal adjustments.

We often finance projects with a combination of private capital, our own cash, and HELOCs. Across those sources, I use approximately 10% as a conservative blended annual cost of project capital for this example.

We also purchase in cash most of the time rather than using hard money, so our buyer-side lender fees are usually lower.

Our refinance is modeled through a local credit union with which we have an established relationship. It typically closes quickly and has, in some cases, streamlined repeat title work. Another borrower should not assume the same terms.

Cost assumptions

Based on those facts, the 1,098-square-foot size, and the expected full-gut scope, my preliminary cost estimate is:

Buyer-side closing costs at the $109,000 asking price

• Realty transfer tax: 2.289% × $109,000 = $2,495
• Title-company charges: $200
• Title insurance: 1% × $109,000 = $1,090
• Recording, conveyancing, and miscellaneous costs: $700
• Buyer-side closing-cost total: approximately $4,485

Note: These buyer-side costs are initially shown at the $109,000 asking price. Because the final offer is much lower, transfer tax, title insurance, and interest should be recalculated at the negotiated price.

Construction: $95 per square foot, assuming I manage and subcontract the project

• Size: 1,098 square feet
• Construction total: approximately $104,000

Holding and miscellaneous costs

• Utilities: $1,000 over the project
• Taxes: $1,819 / 12 = approximately $152 per month; $152 × 6 = $912
• Insurance: $100 × 6 months = $600
• Interest: $10,750
  • Annual interest: 10% × an estimated $215,000 project balance = $21,500 for 12 months
  • Six-month interest: $21,500 / 12 × 6 = $10,750
• Holding-cost total: $13,262

Refinance costs at a $220,000 appraised value through our credit union

• Loan origination fee: 1% of the loan amount
  • Maximum loan assumption: 75% of appraised value
  • Loan amount: $165,000
  • Loan origination cost: $1,650
• Other lender charges: $750
• Appraisal: $465
• Refinance-cost total: $2,865

Total estimated project costs: approximately $124,612, which I round to $124,500 for a quick underwriting target.

At the $109,000 asking price, purchase price plus project costs would create an all-in basis of approximately $233,612.

That basis does not work for our strategy. At a $220,000 ARV and 75% LTV, the maximum gross refinance loan is $165,000. Against a $233,612 basis, we would leave approximately $68,612 in the property before considering any lender-required adjustments. Some investors may accept that, but if we repeatedly left nearly $70,000 in each deal, we would trap our capital in a small number of houses and severely limit growth.

Our primary target is a basis that allows us to recover all, or nearly all, of the capital invested. Completing a project below the refinance proceeds is even better, but naturally harder to find.

The ARV should not be inflated to make the deal work. The scope should remain conservative, and the timeline still has to reflect permitting, construction, lease-up, and refinance. That leaves one meaningful variable: purchase price.

Using the rounded $165,000 refinance proceeds and subtracting the initial $124,500 project-cost estimate produces a first-pass offer of $40,500. Because some costs decline with the purchase price, the exact maximum should be recalculated iteratively; $40,500 is a deliberately conservative opening number, not precision to the dollar. It is far below the $109,000 asking price, and we were comfortable offering it. As of this writing, the seller has not accepted.

Test the rent and coverage

A rental deal must also work from the income side. Our internal rule is that projected rent should cover principal and interest, taxes, insurance, maintenance, capital expenditures, and vacancy reserves by at least 1.25 times. This is a conservative total-cost coverage test. Conventional lender DSCR is generally calculated as net operating income divided by debt service, and each lender may define income, vacancy, and expenses differently.

To estimate principal and interest, use the loan amount, amortization period, and interest rate. Our local lender commonly offers 20- to 25-year amortization depending on LTV, and recent rates for us have been roughly 6.25%–6.75%. On a $165,000 loan amortized over 25 years at 6.5%, the monthly principal-and-interest payment is approximately $1,114.09.

Property taxes are approximately $152 per month and I use $100 per month for insurance. Principal, interest, taxes, and insurance (PITI) therefore total approximately $1,366.09 per month before maintenance, capital expenditures, and vacancy.

For those three operating reserves — maintenance, capital expenditures, and vacancy — we typically model 10%–15% of gross rent. Many lenders use their own standardized expense and vacancy assumptions, so confirm the actual underwriting method.

I expect market rent of roughly $1,900–$2,100. With an approved PHA tenant, the contract rent could be higher, potentially around $2,400 depending on the applicable payment standard, rent reasonableness, unit approval, and tenant share. For this example, I use a conservative blended estimate of $2,150 per month based on our experience in the area.

At 15% of rent, the reserve is $322.50. Total modeled monthly outflow is therefore $1,688.59, and our internal total-cost coverage ratio is $2,150 / $1,688.59 = 1.27x — just above our 1.25x threshold. Under a conventional NOI-to-debt-service calculation, the same assumptions produce an estimated DSCR of about 1.41x: ($2,150 − $152 − $100 − $322.50) / $1,114.09. A lender's result may differ.

A higher appraisal does not automatically justify more debt. If the property appraised for $300,000 and we borrowed the full 75% LTV, the loan would be $225,000. At the same 25-year amortization and 6.5% rate, principal and interest would be approximately $1,519 per month. Total modeled monthly outflow would rise to roughly $2,094, leaving our internal coverage ratio near 1.03x and conventional DSCR near 1.04x. That is far too thin for our risk tolerance.

For a rental, I often work backward from sustainable rent — not just ARV — to determine the maximum loan and offer price. That protects the investor from creating equity on paper while losing money each month.

Final Takeaways

Good underwriting is not about forcing a deal to work. It is about making the deal prove that it works. Start with a conservative ARV, model every cost, choose the exit before you buy, build in a realistic timeline, and require enough profit or cash flow to justify the risk. The spreadsheet will never predict every surprise, but a disciplined process creates the margin of safety that keeps one mistake from becoming a catastrophic project.

This is the foundation for the RJ Homes educational series. Future guides will go deeper into trade-by-trade Philadelphia rehab costs, the appraisal rules I have developed from reviewing completed appraisals, how finished basements and added bedrooms or bathrooms affect value, and how comparable-sale rules change across Philadelphia neighborhoods and suburban markets.

Work With RJ Homes

• New investors: If you are evaluating your first deal and want a second set of eyes, contact RJ Homes through our website. Where there is a fit, we are open to discussing partnerships or project-management support while helping you learn the process.
• Passive investors: If you are looking for real estate-backed alternatives for your capital, contact us to learn about available RJ Homes investment opportunities, eligibility, disclosures, and terms.
• Sellers and agents: This guide shows why our offers are evidence-based. If you have a property that fits our criteria, send it to us. We will evaluate it seriously, explain the number, and close at the price and terms we commit to.

The goal is not to win every property. It is to buy the right property at a basis that protects the project before construction begins. If you have a deal, a property to sell, or capital you want to place with an experienced operator, contact us at RJ Homes through our website and tell us which of those conversations you want to start.

Sources and Methodology Notes

External references support time-sensitive public facts. All project budgets, rent estimates, timelines, and operating assumptions identified as RJ Homes experience remain the author's own underwriting judgments.

• City of Philadelphia: Realty Transfer Tax — current total rate and calculation basis.
• City of Philadelphia: Document Recording and Service Fees — current standard deed-recording fee.
• Redfin: Philadelphia Housing Market — recent citywide days-on-market context.
• National Association of REALTORS: Compensation, Commission and Concessions — broker compensation is negotiable and not set by law.
• Fannie Mae: DSCR Guidance — DSCR framework as net cash flow divided by annual debt service; individual lenders may differ.
• Calculator.net: Amortization Calculator — payment estimate used in the case study.

Educational disclaimer: This article is for general educational purposes and is not legal, tax, accounting, lending, appraisal, construction, or investment advice. Consult the appropriate professionals and perform independent due diligence before purchasing or financing a property.

---

Interested in learning more or discussing an opportunity with RJ Homes? Schedule an investor call to start the conversation.