We invest in real estate to make a profit but 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, 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, a well known investor and mentor, was famous for telling his students that if you looked at 500 properties, you weren’t wasting your time. That looking found you the one that made you 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 – 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. Once again these costs are zero on a flip.
Selling Costs – These can take the form of Realtor fees or if you decide to offer your properties For Sale By Owner the cost of; signs, flyers, ads, time spent answering the phone and showing the property. 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? 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 often pay these on both purchases and sales, these include; survey, title insurance, recording fees, escrow fees, endorsements, messenger fees, legal fees, doc prep fees. These fees are always generated on the HUD.
Subtract these costs from your Sales Price and you are left with your Profit.
Tip: 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.
