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.
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 investments at
http://www.suncoastrenttoown.com
or send a blank email to
mailto:suncoastrenttoown@getresponse.com
