Real Estate Investing Math: How to Make a Profitable Deal
Categories: Blog Posts
Investing in real estate doesn’t have to be a guessing game. Here’s the real estate investing math that works every time.
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.
The Numbers to Follow
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 Math
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.
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