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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.



But with the market now realizing its' condition and the falling values, isn't that going to be a tough thing to do. Don't get me wrong you have the plan right and this is a very good post. Just been watching the numbers for fmv and arv etc falling to where there isn't that margin. The RE pros and banks are just dumping to clear their books. What do you see on that? There are numerous posts/topics on here to that effect, lately. Until the materials prices for repairs come down drastically to match. One might not be able to do as much correct? Catch 22 x 2 = worse economy ???

Sherry, helpme2

I aways go one step farther I take the FMV price minus 10% as my goal selling point then work the numbers from there.When I'm all done I have that 10% cushion, plus I like to offer the property a little below the others to help it move faster. Most times it comes out with a higher profit in the end.

good lesson

Thank you Sherry,

after reading your post I feel like I just took a course in Rehab 101 for new investors!

Very much appreciated!




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