Don’t get taken on your first real estate deal. Learn how to calculate the real numbers when flipping real estate and how to really make money in real estate in any market condition.
If you been in the real estate investing business, or more specifically been flipping real estate, for more than a few days, you’ve inevitably gotten an email that reads something like this:
“Investor’s Dream. This property will go QUICK.
- Property Address: 1234 Main Street
- Asking Price: $100,000 (Add or subtract zeros!)
- After Repair Value: $150,000
- Repairs: $15,000
- Profit: $35,000
- Details: Needs paint, carpet, tile, new kitchen, update bathroom, some roof damage.
- Tenant occupied. Need to evict!”
STOP! Before you read on… Take a guess at what you think the “real” profit’s going to be on this real estate investment…
If you haven’t ever gotten an email or fax broadcast like this, then rest assured, you will! I’m about to probably tick off all of the late night infomercials and pitchmen out there! Sure, I understand that when you’ve got 30 minutes (or 90 minutes, for that matter), that you’ve to sell what’s sexy… not what’s real!
Now it’s my turn to expose the real deal on real estate investing! This goes for flipping real estate itself (i.e. properties) or simply flipping the contract (also known as assigning the contract). When you’re flipping real estate, you need to be able to calculate the “real” bottom line and if your assigning the contract, you need to know your numbers so you don’t get blacklisted from investors! This one piece of information will keep you from getting into trouble because of any “real estate bubble”!
Purchase Costs
Here goes… Have you EVER purchased and sold a piece of real estate for FREE? If you're not sure what the answer is… It's an emphatic NO... You are going to have costs to buy, costs to hold and costs to sell. This holds true even if you are buying a property for all cash. (Think title fees, attorney’s fees, recording fees, etc.)
If you’re not getting a mortgage, your purchase costs are obviously much lower, but nonetheless, there are costs associated with any real estate transaction. Plus, more than likely, if you’re relatively new, you’re probably not paying all cash for property anyways. You’re probably going to be using a hard money investor for your initial real estate investing financing!
For a quick calculation, you can estimate anywhere between 3% - 5% for closing costs to just acquire the property. That’s 3%-5% of the purchase price.
Holding Costs
How much is it going to cost you each and every day to own this piece of real estate? See, if you’re making money in real estate, you’d better believe that there are a lot of other people that are going to expect to get paid and they get paid in the form of mortgage interest, property taxes, utilities, property insurance, etc. Each of these is an expense each and every day that you own the property. Here’s an example… A hard money loan on a bread and butter type piece of real estate might run you 15%. Let’s say you got the property for $100,000. Every month, you are paying $1250 in interest alone. Let’s say that taxes and insurance are another $200/month and then utilities at $100. Right there, the property is costing you $1550/month – or roughly $50/day. See, why it’s important to know your not only your holding costs on a real estate investment, but also how long it’s going to be on the market before you can flip the property.
Selling Costs
Here’s the third part of the real estate investing puzzle. When you want to turn around and sell this piece of real estate, it’s going to cost you yet again! Are you going to use a real estate agent and pay a commission or 3-4-5% or even more? On $150,000, that’s anywhere from $4500 to $7500 chopped of the top. Then, you can figure 1-2% in closing fees.
If you can remember this… and apply what you’ve just learned to each and every real estate deal that you do, you’ll be safe flipping real estate in any market. You see, if it’s a hot market, you can calculate less time for holding cost. But, in a slower market, make your offer based on 6 months or 9 months of holding costs. It’s really simple math! And real estate really is a numbers game…
Recommended Resources:
Finding Deals: www.motivatedsellermarketing.com
Estimating Repairs: www.fixingandflipping.com
Finding Contractors: www.servicemagic.com
Resell or Hold?
When deciding whether to sell for a small property or hold on it it, it depends on what financial situation you are in. If you have a cash flow it is highly recommended holding onto the property, eventually the market will go back up. If you are losing vast amounts of money however, short sale and get out of the deal. Look at your financial situation and do what works best for you.
Make Money Renting
Investing in properties is a great long term investment. Instead of selling your house, you may want to have someone rent out your home, which is essence means they are paying your mortgage. Once the housing market goes up again you could have your home appraised and then sell at a higher price than you were once planning on.
Investing During A Recession
Buying Real Estate during a recession may seem like a scary thing to do but it is actually a great investment move. During a recession many homes are being foreclosed or selling at much less than the asking price. If you research why the house is selling, how long it has been on the market, and what the asking price is, you could end up with a great investment during a recession.
