In real estate investing, unless you can acquire houses low and sell them high, you are likely to make losses. Specifically, you need to buy houses with equity. Generally this applies to all real estate investing 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 property, my numbers were pure guess work. 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.

I did not think my effort justified the little money I made at the end of the day, so I almost gave up pursuing more deals. 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:

Suppose you are buying a $200,000 house for $160,000. At first glance, it may seem to you like you have an equity of $40,000.

But let us look more closely at these numbers.

We will assume the house just needs a new carpet and paint plus a few touch-ups before you can sell it. 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.

The numbers would run 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 is a meager profit of $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.

Scenarios like these are very 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 must also discount your properties to get them sold in a depressed real estate market.

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 have more houses to choose from, so they are more picky.

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

You must also remember that the holding costs could be much higher because it can take as much as 6 months or more to sell a perfect looking house.

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.

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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