How To Buy Houses With Equity In Real Estate Investing

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. This rule generally applies to all business models.

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

When I bought my very first property, my numbers were pure guess work. At the time, the real estate market was such that all properties appreciated with time, so you could still make a profit even with marginal deals.

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.

Let us take an example:

Suppose you are buying a $200,000 house for $160,000. At first glance, it may seem to you like you have an equity of $40,000.

Let us take a deeper look at these numbers.

Let us assume it needs just carpet and paint and some minor touch-ups before you can sell it. Your monthly mortgage payment will be $1300.

Let us assume that you will fix it within 30 days, and that the average time on the market before you can sell it is 90 days.

This is how the numbers would look like:

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.

This is a meager profit of $4550!

You could end up making a loss if you end up spending a little more on repairs or keeping it for 2 more months before you sell it.

Deals like this are quite common with a lot of real estate investors.

This is because you should only work with numbers as PERCENTAGES, 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.

In order to get noticed, your house also needs to be quite attractive both in the asking price and overall condition. Since buyers have more houses to choose from, they have become more picky.

You might therefore have to spend more on repairs to make them more appealing.

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

As long as you stick to a percentage that gives you a good return on investment for your business model, you are likely to remain profitable in your real estate investing business.

About the Author

Successful investing in real estate requires that you acquire your deals cheaply and sustain a continuos flow of good deals that make you a profit. Learn how an automated, interactive real estate investing website can help you acquire more deals using less time, money and effort.

Author (simon87). Submitted on Mon, 16 Jan 2012 Time: 5:00 PM

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