If you¡¯ve 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 ¨C 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
Heather Seitz, the co-creator of Fixing and Flipping software, takes the
guesswork out of estimating repairs. Learn how to estimate repairs and calculate
profits in seconds. Click below for your free video and mini-course: http://www.fixingandflipping.com
