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 - 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
About the author:
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
