Can You Lose Money Investing in Real Estate?
Categories: Blog Posts
The numbers game is surprisingly simple… But can you still lose money investing in real estate?
To make a 15% profit on a real estate investment, all you have to do is keep all of a fix-and-flip’s expenses under 85% of the ARV.
But if the numbers are so simple… How can so many people lose money investing in real estate?
Here’s where investing goes wrong: when investors let emotions change the numbers.
How Emotions Lose Money Investing in Real Estate
What happens when someone finds a property and falls in love with it? They may think it’s worth paying 63%.
That in itself isn’t bad. We can still make a more expensive purchase work as long as we take from another category to keep us under 72.5% for the buy and fix and 85% total.
Where people go wrong is that they don’t make these adjustments…
Let’s say they also let the contractor overspend, leaving the rehab at 15%. Between that and a 63% purchase, we’re already well over our 72.5% max for the purchase and rehab.
Where do we end up if we stray from the numbers just a bit in the rest of the categories, too?
- Purchase – 63% ($189,000)
- Rehab – 15% ($45,000)
- Realtor – 5% ($15,000)
- Cost of Money – 7% ($21,000)
- Miscellaneous – 5% ($15,000)
In this instance, we’d end up with only a 5% profit, or a measly $15,000 on a $300,000 house.
If we let emotions run away with the numbers, suddenly… Real estate investing is hard.
Emotional vs Numbers-Based Real Estate Investing
Done right, a property with a $300,000 ARV should easily bring in $45,000. With an average of three fix-and-flip projects a year, that’s a yearly profit of $135,000. Not a bad take-home pay number.
Done wrong, the very same property could slide into a $15,000 or less profit. Multiply these mistakes by three projects in a year, and you’ve only made $45,000 in the same amount of time, for the same amount of work.
Finding a Balance with the Numbers: How Not to Lose Money Investing in Real Estate
The most successful real estate investors get good at manipulating these numbers.
If you have to pay a little bit more for the property, then you have to cut somewhere else.
Maybe you need to partner with a cheaper realtor, or work on your credit score to lower the cost of your leverage. It has to all come back to the numbers, though. Investing on emotion leaves people frustrated and broke.
Profitable real estate investing is a matter of finding a way to get the numbers to fit.
Read the full article here.
Watch the video here:
https://youtu.be/q9d_ZvUUFfM