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We invest in real estate to make a profit. What is the right way to calculate profit? First, the easy answer. Revenues Less Costs = Profit As we will see in our Advanced Investing, that's not exactly right, but for here, let's work with it and ignore taxes. PROFIT ON A FLIP Flipping has a very straightforward profit, whether wholesaling or retailing. An investment typically has the following items: Revenue = Sales Price Costs can be a little more difficult to calculate, because the list has to be all inclusive: Search Costs - the cost it took to find the property. Robert Allen was famous for telling his students that if you looked for 500 properties, you weren't wasting your time. That looking found you the one that you made money. That being true, searching has a cost and it should be included in a cost calculation. Purchase Costs - Not including closing costs, these costs are usually an appraisal, some type of inspection, may include a formal repair estimate, and any lender fees, such as origination points, processing, application fees, etc. Purchase Price - the price at which you purchased the property. If you purchased it Subject To, then this must include all outstanding liens and property taxes incurred through the purchase date. Carry Costs - interest, late fees, utilities, taxes accrued or paid. These are the ongoing expenses of any purchase transaction and are essentially zero on any flip. Remodeling Costs - Once again, zero on a flip. But the costs of the rehab include, materials, labor and time spent managing the process, looking for contractors and spending time accounting for the repairs. Often, these costs are wildly greater than your initial estimate and management time is drastically underpriced. Selling Costs - Signs, flyers, ads, time spent answering the phone. These costs can add up, but not as much as the emotional energy involved in selling a property. Negotiating Costs - Ever get your full asking price or more? Very rare in Houston in the median price range, and very common in the low-end. A lower price is counted on the Revenue side, but several items are often negotiated that have to be included on the cost side of the ledger. A Refridgerator, a last-minute repair - we have even escrowed money for driveway repairs. Most commonly used are seller-paid closing costs. Closing Costs - An investor will pay these on both purchases and sales except for the experienced and skillful wholesaler. Otherwise, survey, title insurance, recording fees, escrow fees, endorsements, messenger fees, legal fees, doc prep fees. These fees are always generated on the HUD. Just take those costs from your Sales Price and you are left with your profit. Oh yeah, and don't forget your final utility bills versus any deposit you may have left with them. As consuming as it sounds, it is a heck of a lot easier than Estimating Profits, whose numbers vary every step of the way depending on how the remodeling and sales of the property go. RENTAL PROFIT Please see our Rent v Buy Lesson or our Passive Income Investing lessons. If you have questions and would like more dedicated and one-on-one/small group education, we can set up live in-person or on-the-job learning sessions - upon request or at a regularly scheduled time. Related Articles -BASIC EDUCATION OVERVIEW - Basic Investing ARV - After Repair Value Birddogging Contract for Deed Dealing with Contractors Estimating Profits Evictions - A Primer Executory Contract Foreclosure Overview Foreclosure Types Overview Hard Money Loans - a/k/a Asset Based Lending* Lease Options Leverage MAO - Maximum Allowable Offer Multi-Family Investing Basics as Presented by David Lindahl on March 4, 2006 No-Money Down Real Estate Investing Options Part-Time v Full-time Passive Investing For Beginners Pre-Foreclosure Profit Calculation Remodeling for Beginners Rent vs Buy Is Really Rent vs Sell Seller Financing as Investor Buying Tool Skiptracing Subject To Wholesaling Return to Listing Return to Investor Education |
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