I think the biggest hurdle that new investors face when starting their real estate investing business is the fear that they are going to lose money. Either their own money, or their investor/partner’s money.
I am going to let you in on a secret of real estate investing: if you follow a few simple steps, your chance of losing money is extremely slim. By no means am I suggesting that you cannot lose money in real estate; you absolutely can. However, there are some things you can do to minimize the possibility of losing money until it is almost a non-issue.
It boils down to mathematics. If you follow this very simple formula when evaluating a house, you should reasonably expect the job to go very well. Even if things go wrong, you should not be in a position to lose money. The worst case scenario should be that you don’t make as much as you originally planned.
— Realtor fees
— 5% of purchase price (taxes, misc fees)
— Rehab (your mentor can help with this)
— Holding costs (financing, utilities, etc)
— Desired profit (should be around 15%-20% of ARV +)
If you’re not absolutely confident in your ability to determine the after-repair value, consult a realtor who is very familiar with the neighborhood or a mentor/friend with experience in your target market. For example:
— $1,500 (just utilities)
= $42,500 Offer
It’s totally up to you, but I always throw in an extra few thousand dollars for miscellaneous issues that could come up. It’s not very scientific, but it makes me feel better when I place offers.
If you follow these simple steps, you should be very confident in your ability to place offers and make money in every deal.