How To Buy Houses With Equity In Real Estate Investing
To be successful in real estate investing, you must but low and sell high in your real estate deals. Specifically, you need to buy houses with equity. Generally this applies to all real estate investing business models.
So how do you calculate equity to remain profitable in your real estate investing business?
The very first investment property I bought was more out of guess work with the numbers. At the time, the real estate market was such that all properties appreciated with time, so you could still make a profit even with marginal deals.
Even though I did not lose money in the deal, I almost gave up in pursuing more deals because I did not think the effort justified the returns. This was because the numbers and potential equity looked so good I did not think there was any way I could lose.
Let us take an example:
Suppose you are buying a $200,000 house for $160,000. It might look like you have an instant equity of $40,000.
But let us look more closely at these numbers.
Assume that you just need to replace the carpet and repaint the house, plus a few minor touch-ups. Your monthly mortgage payment will be $1300.
Let us also assume that it will take 30 days before you can put it back on the market and that the average days on the market are 90 days.
This is how the numbers would look like:
1) Holding costs for 4 months: $5200
2) 2% closing costs when buying at $160,000: $3200
3) 2% closing costs when selling at $200,000: $4000
4) 6% Realtor's commissions when selling the house: $12,000
5) Carpet, paint and minor touch-ups: $10,000
6) Property taxes prorated for 4 months (approximate): $1050
This is a total of $35,450 assuming nothing goes wrong.
In other words, your total expense in this deal is $160,000 plus $35,450, or $195,450.
This is a meager profit of $4550!
You could end up making a loss if you end up spending a little more on repairs or keeping it for 2 more months before you sell it.
Scenarios like these are very common with real estate investors.
You should only work with numbers are PERCENTAGES not dollar figures.
When I buy my wholesale deals, I acquire them at 65% minus repairs or lower.
Remember you also need to sell your properties at a discount to get them sold.
Your house also need to be really attractive both in the asking price and overall condition to get noticed. Buyers have more houses to choose from, so they are more picky.
This means you may have to spend more money on repairs to make it more appealing to buyers.
You must also remember that the holding costs could be much higher because it can take as much as 6 months or more to sell a perfect looking house.
As long as you stick to a percentage that gives you a good return on investment for your business model, you are likely to remain profitable in your real estate investing business.
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Successful investing in real estate requires that you acquire your deals cheaply and sustain a continuos flow of good deals that make you a profit. Learn how an automated, interactive real estate investing website can help you acquire more deals using less time, money and effort.
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