Do You Have a Formula?

Over the past week, I have received quite a few inquiries from real estate investors asking me to help them build their portfolios through purchase-rehab-sell (I despise the word "flip"). When I initially speak with an investor, I ask a lot of questions. Unfortunately, many don't have some of the most important answers.

To invest in real estate, you must have a goal, an objective. You must also have a formula. We cannot create a successful real estate investment plan without the formula.

It's really very simple: P = ARV - (PC + SE + HC + RC). Where P = profit, ARV = Approximate retail value, PC = purchase cost (not purchase price), SE = selling expenses, HC = holding costs and RC = rehab costs.

For investors who use short term rehab financing, HC will be much higher than those who pay cash out of a savings account. RC will be higher for the investor who contracts out the work than the one who can do a lot of the work himself (keep in mind to factor TIME into that figure though if you rehab yourself). SE - it is common in your area/price range for the seller to pay the closing costs for the buyer? Be sure to include that as well as any other factors such as required radon inspections. PC is much different than PP (purchase price) as there are always costs associated with the actual purchase of the property.

ARV. My next blog post will address this value as this is one of the most miscalculated figures by investors. In the meantime, play around with this formula and some figures. You should be able to get a pretty good idea of what your bottom line is when investing in PRS (purchase-rehab-sell) real estate.

By the way, it's OK to insert the P=Profit figure first. That is why I put it at the beginning of the equation, not the end. P also equals your goal, your most important objective. By inserting P first, you are being a pro-active rather than re-active investor.