There are several ways in which one can invest successfully in the real estate industry. There is a large population of investors who look to get involved in a high volume of deals with the idea of gaining experience and contacts. Volume is nice, but there has to be a minimum amount of profits made on every deal to make them worth your time. Getting involved with deals can grow your business exponentially, but only if you are making money. With every deal you get involved in, you need to focus on the bottom line.
There are some auxiliary benefits to closing more deals, but ultimately you are not judged on the number of deals you close, but rather how much was made on them. Anyone involved in real estate will tell you that it takes a lot to close a successful transaction. One deal alone can take weeks, if not months, and drain your focus away from other opportunities. If all you are getting out of the deal is a minimal profit, but gaining experience and increased contacts, you need to examine if it is really worth it. There is nothing wrong with hitting singles instead of home runs, but you need to know exactly what you are getting into before you start.
It is one thing to know you are going to make a minimal profit before you start and another to be caught off guard as the deal progresses. Too many investors do not know everything about the deal and what their bottom line will be. They are too worried about trying to get the deal closed that they do not look at what is really important – the bottom line. You need to spend the time and do your due diligence on the market, expenses and property. It can be tempting to estimate a number that you are unsure on or to speculate where the property value will be in a few months, but by doing that you are now essentially gambling on a deal instead of investing. All it takes is one of these deals to leave you with a property that drags down the rest of your portfolio.
The simplest way to break down potential profits is to take your acquisition price plus expenses and estimate if your end sales price is higher. Sounds simple enough, but there are many variables and formulas that go into each. You need to be a master in every one of these areas. Regardless if you are buying to rent or buying to rehab, you need to start with your acquisition price. Where are you coming up with your offer price? Instead of just throwing a number out, you need to have data to support your offer. You can use the 70% rule or look at comparable sales and listings in the area, but the offer price is the starting point for profits. If you are just trying to acquire the property and figure it out after you take ownership, you are already starting the deal with one strike against you.
The second step in calculating profits is to know all of the expenses that will go into the deal. Depending on what you are doing with the property, it will range from loan repayment, taxes, insurance, utilities and any work you want done on the property. Each of these costs must be accounted for, verified and then used to see if there is profitability in the deal. If you do not know the costs, you have to wait until you do or pass on the deal. Rushing to get involved when the repair costs could be thousands of dollars higher is not good business. It is also critical to be realistic with these numbers. Otherwise, all you are doing is fooling yourself. Once you get started, you will be chasing a number that may have never been there. Eventually you will have to get what you can and get out, but not before you risk taking a loss on the property.
The final step in calculating the bottom line is to look at end goals and your end number. If you are rehabbing, what do you think you can sell for? If you are renting, what will be the monthly rent number? Most investors place too great of a value on the work they put in the house and think the return will be greater than it really is. Doing the right improvements will add value, but not as much as you may think. You need to take an honest look at the comparable and see how your property stacks up in comparison. The more realistic you are in this area, the sharper you will be focusing on properties with the best return on your time and money.
Looking at properties and deals is a very exciting part of the business, but not the main goal. You need to be focused on the bottom line and have a good idea of your potential profits before you get started on every deal. Have a plan on every transaction, know what you are getting into and always keep an eye on the bottom line.
