Investing in real estate is an often over-complicated topic.
Why? Well in general, it's because investing in real estate is real people, investing real money and depending on your prior experiences with investments, that can be scary.
To compensate for the fear, most people make it out to be much more complicated that it really has to be.
Warren Buffet says it best, "Price is what you pay, Value is what you buy.
" That simple phrase is your key to success as a real estate investor.
You must pay little for something of much greater value.
Let me explain.
A single family neighborhood consists of 2 bedroom 1 bath houses, 3 bedroom 1 bath houses and 3 bedroom 2 bath houses.
Some of the houses have basements and some have garages.
GROUP PROPERTY TYPES So, the first thing to do is to determine value.
Here's how to do it.
Group each of the properties in the neighborhood.
What I mean is simply this.
If the property is a 3 bedroom, 1 bath house with no basement and a 1 car garage, compare the value of that property to the other properties in the same area that are exactly the same.
Notice here that I did not say compare price.
It is impossible to compare price.
Your objective is to determine the approximate value of a particular property type in a particular area.
DETERMINE VALUE When you "evaluate" a real estate investment, I want you to evaluate the deal as if the property was already fixed up.
This is all about perspective.
You see most people look at a beat-up out house and only see a beat-up house.
From that perspective, it's very complicated to wrap your mind around both price and value.
Here's what I want you to do.
You must evaluate the potential of the deal as if the property was already fixed up.
As you look at the property I don't want you to see a bad roof, broken windows and a moldy bathroom.
You need to see a new roof, all new double pane vinyl windows and a brand new clean bathroom.
Then, based on that future "fixed" up condition, determine the fixed up value of the property.
This is known as the After Repaired Value or ARV.
Ok, you now have a value anchor from which you can start determining price.
ESTIMATE FIX-UP COSTS The next part to the puzzle are this.
You must estimate the cost to fix up the property.
Now notice this.
I did not say that you must determine to the penny your exact fix up budget.
I said that you must estimate your fix up costs.
You'll get more detailed later in your process, but up front, it is important to move quickly and efficiently and not get bogged down with the minute details that are important later, but right now rob you of precious time.
From here you can quickly and easily determine price.
CALCULATE YOUR MAXIMUM OFFER PRICE How? Well, let's think about it really quick.
What do you know so far? You know value and you know the estimated cost it will take to get that value.
From there it is a relatively straight forward calculation to land on your maximum purchase price.
You just need to subtract the fix up cost and all the "extra" costs that go into the deal, like closing costs, holding costs, the cost of money, sales costs and (don't forget) your profit from your ARV anchor and you've can quickly and easily determined your maximum purchase price each and every time.
Why? Well in general, it's because investing in real estate is real people, investing real money and depending on your prior experiences with investments, that can be scary.
To compensate for the fear, most people make it out to be much more complicated that it really has to be.
Warren Buffet says it best, "Price is what you pay, Value is what you buy.
" That simple phrase is your key to success as a real estate investor.
You must pay little for something of much greater value.
Let me explain.
A single family neighborhood consists of 2 bedroom 1 bath houses, 3 bedroom 1 bath houses and 3 bedroom 2 bath houses.
Some of the houses have basements and some have garages.
GROUP PROPERTY TYPES So, the first thing to do is to determine value.
Here's how to do it.
Group each of the properties in the neighborhood.
What I mean is simply this.
If the property is a 3 bedroom, 1 bath house with no basement and a 1 car garage, compare the value of that property to the other properties in the same area that are exactly the same.
Notice here that I did not say compare price.
It is impossible to compare price.
Your objective is to determine the approximate value of a particular property type in a particular area.
DETERMINE VALUE When you "evaluate" a real estate investment, I want you to evaluate the deal as if the property was already fixed up.
This is all about perspective.
You see most people look at a beat-up out house and only see a beat-up house.
From that perspective, it's very complicated to wrap your mind around both price and value.
Here's what I want you to do.
You must evaluate the potential of the deal as if the property was already fixed up.
As you look at the property I don't want you to see a bad roof, broken windows and a moldy bathroom.
You need to see a new roof, all new double pane vinyl windows and a brand new clean bathroom.
Then, based on that future "fixed" up condition, determine the fixed up value of the property.
This is known as the After Repaired Value or ARV.
Ok, you now have a value anchor from which you can start determining price.
ESTIMATE FIX-UP COSTS The next part to the puzzle are this.
You must estimate the cost to fix up the property.
Now notice this.
I did not say that you must determine to the penny your exact fix up budget.
I said that you must estimate your fix up costs.
You'll get more detailed later in your process, but up front, it is important to move quickly and efficiently and not get bogged down with the minute details that are important later, but right now rob you of precious time.
From here you can quickly and easily determine price.
CALCULATE YOUR MAXIMUM OFFER PRICE How? Well, let's think about it really quick.
What do you know so far? You know value and you know the estimated cost it will take to get that value.
From there it is a relatively straight forward calculation to land on your maximum purchase price.
You just need to subtract the fix up cost and all the "extra" costs that go into the deal, like closing costs, holding costs, the cost of money, sales costs and (don't forget) your profit from your ARV anchor and you've can quickly and easily determined your maximum purchase price each and every time.
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