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How to Calculate Real Estate Investment Profits
from: Peter DoblerCopyright 2005 Peter Dobler
If you are investing in real estate you will face a variety of
challenges. First you have to find the right property. Finding
the right property is a combination of personal preferences and
opportunities involved in a real estate deal. My most important
real estate investment principle is; "You make money with real
estate when you buy the property not when you sell it". This
means that I wouldn't touch a rehab property where the purchase
price is not below 65%-70% of the market value.
Why do you need such a low price to make it work? This is quite
simple. A common guideline among investors is that you must make
at least $10,000 to make it worthwhile. Remember you're an
investor and not a handyman. Rehab projects last typically 4-6
months, sometimes even longer. You don't want to end up making
minimum wage as a handyman after the project is done. Quite
frankly this is not uncommon for first time investors.
Real estate investment is all about numbers. If the numbers are
right you must make every mistake in the book to turn your
project into a financial disaster. That's why you must buy the
property as cheap as possible. Selling the property is your
least problem. First you have to put together a budget. Here's a
little example.
Property A is located in a decent neighborhood with average home
resale values of $150,000. That's what our property will
appraise after the repairs are done. We also take out a hard
money loan with 4 points and 12% (interest only) for 100% of the
purchase price. We calculate that the property will sell for
$150,000 in 6 months. There are about $10,000 in repairs you
have to take care of.
Property A
Purchase Price $100,000
Purchase Closing Cost $8,000 (fees + 4 points)
Holding Cost $6,000 (6 months of interest)
Repair Cost $10,000
Insurance, Utilities $2,000 (you need a vacant property
insurance which is more expensive)
Selling Closing Cost $13,000 (6% realtor fee of $150,000 +
closing cost)
Total $139,000
Selling Price $150,000
Expenses -$139,000
Total Profit $11,000
This is just a very simple example, but I hope you get the
picture. Keeping track of the numbers is essential in real
estate investment. In the example above just imagine what
happens if you spend more money for the repairs or you have to
sell the property for less money. Even worst if you can't sell
the property within 6 months and after 9 months you sell it for
less money. Not only did you loose on the selling price you had
3 months of interest piling up as well.
When you're investing in rehab properties you have to have an
exit strategy. My exit strategy is, to rent the house and
refinance the hard money loan if I can't sell the property after
6 months for the price I'm asking for. This will cover my
monthly expenses and I have more time to sell the property when
the market is better. Actually converting a rehab property into
a rental can be a very profitable choice of real estate
investment. Friends of mine are doing quite well with this
strategy.
Bottom-line; crunch the numbers, make a budget, keep track of
your expenses and have an exit strategy. Having this in place
you're good to go.
About the author:
Peter Dobler is a 20+ year veteran in the IT business. He is an
active Real Estate Investor and a successful Internet business
owner. Learn more about real estate investment at
http://www.suncoastrenttoown.com or signup to his real estate
investment newsletter by sending a blank email to
mailto:suncoastrenttoown@getresponse.com
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