How to Calculate Real Estate Rehab Profits
By Peter Dobler
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
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