Is Real Estate Investing Hard? Here’s the Main Reason Why People Fail
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People who flop in real estate investing tell horror stories. But is real estate investing hard? Here’s the truth.
Real estate investing is a great way to make money and achieve financial freedom. But it can also be a minefield for those who don’t know what they’re doing.
After helping hundreds of investors over the last 20+ years, we notice that most people who fail at real estate investing share the same struggle…
They invest based on emotions rather than numbers.
They get greedy, or they buy on a gut feeling, or they become fearful they’ll lose all their money. All this leads to delusion about the numbers of a property.
But in reality, is real estate investing hard?
Let’s go over the basic numbers of a fix-and-flip investment to see how simple the math breakdown really is.
Is Real Estate Investing Hard? What Are the Numbers?
Real estate investing is a number puzzle. There are a lot of different metrics and ratios that you need to be aware of, such as credit scores, DSCRs, and more.
However, when it comes to basic fix-and-flips, the most important number to focus on is ”The 85% Rule.”
This rule tells you exactly how to stick to what you know will make you money.
Following the ARV Rules
Every fix and flip property has an “after-repair value,” or ARV, that tells you what the value of the home will be after a rehab.
If you want to make money off your flip, your project’s total expenses must stay under 85% of the property’s ARV.
Specifically, the purchase price and the rehab price combined should cost no more than 72.5% of the ARV.
Following this rule strictly will leave you with at least 15% profit on every real estate investment.
Example of the Real Estate Investing Numbers
Let’s use an example to show these real estate investing numbers.
Say we found a good property with an ARV of $300,000. Regardless of whether we “love” the property, think we can make a hundred thousand dollars off of it, or any other emotional reaction… Let’s see what the numbers say.
Here’s how much each portion of this project should cost if the ARV is $300,000:
- Purchase – 60% ($180,000)
- Rehab – 12.5% ($37,500)
- Realtor – 4.5% ($13,500)
- Cost of Money – 5% ($15,000)
- Miscellaneous – 3% ($9,000)
If the seller can swing the price, and your contractor can quote you a budget within that frame… then this might just be a great investment.
But what if your contractor can’t get the job done for any less than 15%? Does that ruin your chances with this property? Not necessarily, but it does mean that the extra 2.5% has to come off the purchase price. So if you can still buy the property for 57.5%, go for it!
In this example, keeping everything under 85% leaves us a healthy profit margin of 15% – or $45,000.
Where Do People Go Wrong in Real Estate Investing?
If the numbers are so simple, why would someone think real estate investing is so hard? How is it possible to mess it up?
Here’s where real estate investing goes wrong: when investors let emotions change the numbers.
How an Emotional Investment Shakes Out
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
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.
Numbers vs Feelings: Is Real Estate Investing Hard?
So, is real estate investing hard? It can be, but it doesn’t have to be.
By understanding the numbers and sticking to them, you increase your chances of success. Of course, there will always be some risk involved in any investment, but by focusing on the numbers, you’re making informed decisions and setting yourself up for success.
We’ve seen too many clients come to us with a bad deal and an emotional approach to fixing it. We want to teach you the basics to make sure you don’t suffer the same fate.
Download our free deal analyzer to see if the numbers work on your project.
Send us an email at Info@TheCashFlowCompany.com with any other questions about real estate investing.