The #1 mistake failed investors make (and how to achieve real estate success instead).
Playing by the numbers: the tried-and-true way to make money in real estate.
After helping with thousands of transactions, we’ve seen in action that the number one way to make money is to invest by the numbers rather than by emotions.
Real estate success is determined by who goes by the numbers, and who goes by emotion, greed, and delusion.
So, what are the numbers that get you this success? Let’s go over what numbers you’ll need to purchase, rehab, and sell the property to profit every time.
What Are the Numbers for Real Estate Success?
Let’s look at an example of a full fix-and-flip process for a property with an ARV of $300,000.
Before we buy this property, we have to get some estimates to find out if it’ll really make us money.
Two numbers in particular will help us out:
- If you want to make money off your flip, your project’s total expenses must stay under 85% of the property’s ARV.
- Specifically, the purchase price and the rehab price combined should cost no more than 72.5% of the ARV.
Keeping that in mind, here’s how much each portion of this project should cost if the ARV is $300,000:
- Purchase – 60% ($180,000)
- Rehab – 12.5% ($37,500)
- Realtor – 4.5% ($13,500)
- Cost of Money – 5% ($15,000)
- Miscellaneous (insurance, closing, etc) – 3% ($9,000)
But what if the purchase of the property is going to cost you 62%? Do you have to throw the whole deal out the window? Not necessarily. If you need to add 2% in one category, you just have to subtract the same amount from a different one.
For example, a 62% purchase will work just fine in this instance if you can bring the rehab cost down to 10.5%.
Keeping everything under 85% leaves us a healthy profit margin of 15% – or in this example, $45,000.
If you follow these numbers, and you do three investments per year, you can make $135,000 in profit total from properties that sell at $300,000.
Where Investors Go Wrong – A Failed Investment
Simple enough. But obviously… Real estate investments go wrong for people sometimes. Do the numbers lie?
In our experience, it’s never the numbers and always the emotions behind the numbers that make an investor lose in real estate.
You may know that you can only afford 60% on the purchase of the property. But then maybe you really like the house, and you still take it for 63%.
And then, your contractor talks you into some cool upgrades that would put your rehab budget up at 15%.
You’re already above your 72.5% for this portion of the project, then the rest of the categories slip away from you too, until the project looks something more like this:
- Purchase – 63% ($189,000)
- Rehab – 15% ($45,000)
- Realtor – 5% ($15,000)
- Cost of Money – 7% ($21,000)
- Miscellaneous – 5% ($15,000)
Where did our 15% profit go? Somehow, we’re left with only $15,000 at the end of this project – or 5% of the total sale price.
If we keep making these emotional mistakes in our investments, after three properties, we’ve made only $45,000 (rather than the $135,000 we could have made for the same effort while staying within our budget).
This minimal profit is what frustrates new investors out of the industry.
How to Achieve Real Estate Success By Investing with Numbers
Bottom line: if you invest by the numbers, you’re going to profit. When you bring too much emotion into your investing business, you end up broke and frustrated.
To help you stay on track with your numbers, you can download our free deal analyzer tool here.