How To Buy Houses With Equity In Real Estate Investing

To be successful in real estate investing, you must but low and sell high in your real estate deals. Specifically, you need to buy houses with equity. You will find this rule applies to all business models in real estate investing.

So how do you figure out the equity in your deals to remain profitable?

The very first investment property I bought was more out of guess work with the numbers. At the time, all properties appreciated in value over time, so you could always make money even with deals that did not look so good.

Even though I did not lose money in the deal, I almost gave up in pursuing more deals because I did not think the effort justified the returns. This was because the numbers and potential equity looked so good I did not think there was any way I could lose.

Let us take an example:

Let us assume you are buying a $200,000 house for $160,000. It might look like you have an instant equity of $40,000.

But let us look more closely at these numbers.

Assume that you just need to replace the carpet and repaint the house, plus a few minor touch-ups. You will be making a monthly mortgage payment of $1300.

Let us assume that you will fix it within 30 days, and that the average time on the market before you can sell it is 90 days.

Your numbers will look something like this:

1) Holding costs for 4 months: $5200
2) 2% closing costs when buying at $160,000: $3200
3) 2% closing costs when selling at $200,000: $4000
4) 6% Realtor's commissions when selling the house: $12,000
5) Carpet, paint and minor touch-ups: $10,000
6) Property taxes prorated for 4 months (approximate): $1050

This is a total of $35,450 assuming nothing goes wrong.

In other words, your total expense in this deal is $160,000 plus $35,450, or $195,450.

This represents the profit of a whooping $4550!

You could end up making a loss if you end up spending a little more on repairs or keeping it for 2 more months before you sell it.

This scenario is quite common with real estate investors.

When you do your numbers, you must use PERCENTAGES instead of dollar figures.

I acquire my wholesale deals at 65% minus repairs or lower.

In a depressed real estate market, you must also remember that you will need to give a discount when selling your properties to get them sold.

Also remember that because there are too many houses sitting in the market, your house must be really good both in the selling price and the overall condition to get noticed. Buyers today are more picky because they have more houses to choose from.

You might therefore have to spend more on repairs to make them more appealing.

You could end up holding the house as long as 6 months, increasing your holding costs.

As long as you stick to a percentage that gives you a good return on investment for your business model, you are likely to remain profitable in your real estate investing business.

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