How To Preserve As Much Profit As Possible On Your Next Deal
It’s no secret that real estate can be a really profitable investment.
I mean, that’s why you’re here, and it’s probably why you joined the community; to learn as much as you can about real estate, and make some profit with it.
But if it were easy, everyone would do it.
The truth is, real estate can be a super-profitable venture, but it can also be a really risky one. The good news is that you can be aware of the major things that can and do go wrong in real estate deals. By learning about them in advance, and taking action now to avoid them, you’ll help earn as much profit as possible in your future investments.
I asked some real estate professionals to comment on the most common reasons investors lose out on profit, and most fell into just a few different categories. So whether you’re interested in flipping, wholesaling, or commercial – there are a handful of common profit-killers to watch out for…
Bottom line: it’s all about the numbers.
Look, at the end of the day, the biggest reasons investors or flippers lose out on money is because they got their numbers wrong.
Sure, there are always unforeseen things that can (and do) go wrong. Some things you just can’t prepare for. But after getting responses back from investors in the space, it was telling how many of them echoed the same dangers, all of which had to do with the numbers: overpaying, underestimating, overestimating worth, and so on.
So if you don’t feel like reading the entire article, I’ll save you the trouble in this one summary: get your numbers right. As Dustin, the owner of Island Property Buyers says – the biggest things that are going to kill your profit are, “overpaying for a property, not accounting for rehab overage costs and not being conservative with your timeframe on your flip. Always be conservative with your numbers to minimize risk.”
However, I don’t think it’s especially helpful to focus the article around “get your numbers right.” Because if you’re new, you’re probably thinking, “right… but what areas do I need to know? What specific numbers should I be looking at?”
So let’s break down each one, step by step:
Mistake #1: Paying too much for the property.
“The biggest profit killer to a flip is buying too high,” says Dara, co-founder of Properties ATL, “money is always made in the “buy” of a property not the “sell”. No matter what unforeseen defects or issues a flip property may have, if you buy it low enough and properly calculate your resale value, your profit should be healthy.”
Think of it this way, if you buy too high – you’re in trouble from the start. Even if your costs are low, your renovation is on-budget, and you sell it for what you want, you’ll be lower than what you could’ve been. You’re essentially starting at a deficit that’s impossible to make up.
Mistake #2: Under-estimating repair costs.
Not taking into account all the repairs the home will actually need, is the second major cause of profit loss. This sounds obvious, but if you’re not experienced with renovating a home, and don’t know what to look for, this can really be a huge pitfall for you.
Van, who co-owns Qualified Property Solutions, warns that “the biggest threat in any real estate transaction is your own level of awareness. You fall to your highest level of preparation. What you don’t know can, always will, and always has, hurt you. Getting emotionally involved and not knowing your numbers can be one of the biggest deal killers. Most people tend to of be overly optimistic on property values and underestimate repair costs.” Darrell runs D57 Investments, and does everything from buying and flipping, himself. So when it comes to estimating rehab costs, he’s no novice. He echoes that when it comes to getting the most money out of a flip, “you must know your ARV (after repair value) and be able to estimate repairs properly” in order to walk away with solid profit.
Look, don’t get me wrong – optimism is great. But it doesn’t belong in math, or in things that are an exact science. If you want to take home the most profit possible, you’ve got to be accurate and realistic in your assessment of what the property actually needs in repairs.
If you’re new, it might be tempting to buy the home for a number of emotionally-driven reasons:
- “What if another one doesn’t come around for a while?”
- “I’m sure it won’t be as bad as it looks!”
- “My contractor is really good and can work with this.”
Don’t let emotion or blind optimism keep you from getting an accurate estimate of what the repairs on the home will cost. If you do, you’ll end up spending a lot more, and be eating away from your potential profit. This is one of the reasons some first time “flippers” essentially end up breaking even on their first deal. They pour everything into the home, and while it’s a valuable learning experience, it’s not a very profitable one.
Mistake #3: Overestimating what the property can sell for.
The third mistake beginners make is overestimating what the home will actually sell for. This is an area that you want to be heavily data and market-driven, not a rough guess or optimistic idea.
Wade has run Mitchell Property Group in Amarillo for 10+ years, as both an investor and Realtor. He advises, “Most investors do not understand how to look at market comps correctly. They get bad advice from a Realtor and overestimate the resale value on a potential flip. They also underestimate repairs costs and forget to factor in holding costs such as property taxes, utilities, insurance, and of course interest payments. The best way to avoid this is to either find a Realtor who is also an active investor to help them through the process. If they can find another successful investor to guide them through the process it is even better.”
So take Wade’s advice, and don’t just take a Realtor’s word for it. Do your homework. Shadow a successful investor in the area (or get coached by one remotely). Learn what homes sell for in a given neighborhood in similar conditions. Study market trends in your area. Learn from those who have gone on before you and been successful.
Mistake #4: Working with unreliable contractors.
If the first 3 mistakes you can make deal with numbers (buying too high, underestimating repairs, and overestimating sale price), this one deals with actually executing on the rehab or flip.
The truth is, even if you get your numbers spot on, if the people actually doing the work are 30% slower, make significant and costly mistakes, or advise you wrong, your profit will likely suffer. This tip comes from Lavon, who runs 210 Home Buyers: “the biggest profit killers to a deal or flip are poor budgeting, poorly structured contracts and working with unreliable contractors who are not vetted properly.”
If you’re new to home renovations, it might be tempting to go with the contractor who’s the cheapest, and most available.
But this would be a big mistake.
I’d recommend asking around and finding contractors that other investors have used and recommend. Meet with them, interview them, ask the right questions, ask for case-studies or read their reviews on Google. Make sure that you properly vet them. Find out about their timeliness, their track record on completing projects on time and on budget, job site cleanliness, and more.
To your success.
So yes, real estate can be very, very profitable. Lots of investors or independent flippers have done really well for themselves. But for every one of them, there are many more that have gone into debt, lost significant profit, or gone through a ton of work only to break even.
The good news is that most causes of profit-loss boil down to buying too high, not knowing the home’s worth, not doing your homework on the market and neighborhood, poorly estimating the rehab costs, and hiring the wrong contractor. This is good news, because it’s something you can prepare for now, before you make your first investment. Get involved in the community here, ask questions in the forum, and do your homework, so that when the time comes, you’re ready.