In this episode, I discuss one of the worst things you can do as a real estate investor. This is probably one of the most common mistakes, if not the most common mistake, that new real estate investors make: reaching for a deal and lying to yourself about the numbers.
When you’re just starting out in real estate, one of the things that you should educate yourself about right off the bat is learning how to run the numbers. By that I mean literally learning the number variables needed when deciding whether or not something is a good deal.
If you are flipping houses, there are a few numbers that are critical that you understand. I have gone over these in great detail in other episodes so I’m not going to go into that here, but I do want to quickly list the numbers that are critical for a flip:
- Rehab cost
- Realtor fees
- Closing costs
- Purchase price
- Your desired profit
Each one of these numbers is very important. You can calculate all of them yourself with the right resources and experience. But chances are you’ll have to rely on someone else to give you some of these numbers, such as the ARV and rehab cost, especially when you’re starting out. Those are the variables that probably have the biggest impact on your ability to turn a profit on a flip.
So when I tell you never to reach, I am telling you not to underestimate or be overly aggressive on the ARV or the rehab cost. If a realtor with a lot of experience tells you that a house that you were looking to purchase will only sell for $100,000 in top condition, don’t assume that you can get $105,000 or $110,000. Additionally, if your contractor tells you it’s going to cost $50,000 to rehab house, don’t assume that you can get that number down to $35,000 or $40,000. Finally, if your desired profit for the flip is $20,000, don’t just settle for $5,000 or $6,000 because you want the deal so badly.
You find a lead, and you want to turn it into a deal so badly that you inflate the ARV, lowball the rehab costs and lower your desired profit. Then, when the ARV turns out to be exactly what you were told it was and the rehab budget goes over, you are stuck with a deal that probably won’t make a profit, or, even worse, you will lose money. I have seen this happen and it’s almost always because the investor ignored all of the signs and all of the advice that he or she had been given.
Trust the numbers. If the deal doesn’t look like it’s going to be profitable, or the margins are so razor thin that not one thing can go wrong, walk away. Never, ever, ever get emotionally attached to a deal. It will almost always spell disaster.