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How to Buy Houses with Equity in Real Estate Investing

By Simon Macharia Subscribe to RSS | January 16th 2012 | Views:

In real estate investing, you are likely to make losses if you do not buy low and sell high. This means you must buy houses with equity. This rule generally applies to all business models.

So how do you know that a house has enough equity to make a profit for you?

When I bought my very first real estate investing deal, I simply gambled with numbers. At the time, the real estate market always promised that the prices would appreciate with time, meaning you could still make money even with marginal deals.

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. The numbers had looked so good I did not think there was any way I could lose.

Let us take an example:

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

Let us take a deeper look at these numbers.

Assume that you just need to replace the carpet and repaint the house, plus a few minor touch-ups. You are taking a mortgage on it, with $1300 monthly payments.

We will assume that you will complete repairs within 30 days, and that houses are sitting an average of 90 days on the market before you can sell them.

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.

Your profit in this deal is just $4550!

If anything goes wrong and you end up spending more in repairs, or it takes two more months before you can sell it, you are end up making a loss in the deal.

This scenario is quite common with real estate investors.

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

When I buy my wholesale deals, I acquire them at 65% minus repairs or lower.

Remember you also need to sell your properties at a discount to get them sold.

Your house also need to be really attractive both in the asking price and overall condition to get noticed. Since buyers have more houses to choose from, they have become more picky.

To make them more appealing, you might have to spend more on repairs.

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

You are more likely to remain profitable in your real estate investing business if you work with percentages that give you a good return on investment for your business model.

Simon Macharia - About Author:
Successful investing in real estate requires that you acquire your deals cheaply and sustain a continuos flow of good deals that make you a profit. Learn how an automated, interactive real estate investing website can help you acquire more deals using less time, money and effort.

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