If youve been in the real estate investing business, or more specifically been flipping real estate, for more than a few days, youve inevitably gotten an email that reads something like this: Investors 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 profits going to be on this real estate investment
If you havent ever gotten an email or fax broadcast like this, then rest assured, you will! Im about to probably tick off all of the late night infomercials and pitchmen out there! Sure, I understand that when youve got 30 minutes (or 90 minutes, for that matter), that youve to sell whats sexy not whats real!
Now its 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 youre 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 dont 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, attorneys fees, recording fees, etc.)
If youre 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 youre relatively new, youre probably not paying all cash for property anyways. Youre 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. Thats 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 youre making money in real estate, youd 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. Heres an example A hard money loan on a bread and butter type piece of real estate might run you 15%. Lets say you got the property for $100,000. Every month, you are paying $1250 in interest alone. Lets 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 its important to know your not only your holding costs on a real estate investment, but also how long its going to be on the market before you can flip the property.
Selling Costs
Heres the third part of the real estate investing puzzle. When you want to turn around and sell this piece of real estate, its 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, thats 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 youve just learned to each and every real estate deal that you do, youll be safe flipping real estate in any market. You see, if its 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. Its really simple math! And real estate really is a numbers game
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