In real estate investing, you are likely to make losses if you do not buy low and sell high. Specifically, you need to buy houses with equity. Generally this applies to all real estate investing business models.
So how do you figure out the equity in your deals to remain profitable? In real estate investing, you are likely to make losses if you do not buy low and sell high. This means you must buy houses with equity. Generally this applies to all real estate investing business models.

So how do you know that a house has enough equity to make a profit for you?

The very first investment property I bought was more out of guess work with the numbers. At the time, all properties appreciated in value over time, so you could always make money even with deals that did not look so good.

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. Since the numbers looked so good, I did not think there was any way I could lose.

<b>Let us take an example:</b>

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.

We will assume the house just needs a new carpet and paint plus a few touch-ups before you can sell it. You will be making a monthly mortgage payment of $1300.

We will assume that you will complete repairs within 30 days, and that houses are sitting an average of 90 days on the market before you can sell them.

Your numbers will look something like this:

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.

<b> Your profit in this deal is just $4550!</b>

If anything goes wrong, such as spending a little more in repairs or it takes 2 more months before you can sell it, you will end up making a loss.

Scenarios like these are very common with real estate investors.

This is because you should only work with numbers as <b>PERCENTAGES</b>, 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. Since buyers have more houses to choose from, they have become more picky.

To make them more appealing, you might have to spend more on repairs.

You holding costs could drastically go up because you could end up holding it as long as 6 months or more.

You are more likely to remain profitable in your real estate investing business if you work with percentages that give you a good return on investment for your business model.

By: Simon Macharia

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Article Tags: real estate investing , real estate investors , investment property , real estate investing website

Submitted On Jan 17, 2012. Viewed 23 times.