When you’re a real estate investor, creating a formula for purchasing property that is consist that works saves huge money. Making sure the numbers work while buying investment prop the right price is crucial to making money as an investor. Read below to see what has worked and how building a repetitive system is vital for all investors.
Anyone who ventures into real estate investing hopes to make a nice profit. Whether the investor is a fix and flipper, a landlord or even a wholesaler, knowing that the deal is a good deal depends on one thing: the numbers. In this article, we show you how to profit in real estate investing by using the right formulas to boost your bottom line.
Why Formulas In Real Estate Investing Matter
The numbers help mitigate risk.
The numbers help project profits.
The numbers can maximize funding and lower the cost of money.
And the numbers help develop short and long term investing plans.
The formulas used vary depending on the end goal and the property type. Are you looking for long-term returns? Is the goal to create a quick income boost – sort of “one and done” as with flipping and wholesaling? Once the goal is determined, the formulas can be applied and the numbers crunched.
“The truth is that a real estate investment is only as good as the numbers you’ve crunched.”
The Goals of Real Estate Investing
If we look at real estate investing at its most basic, the goals are simple. You want any (or all!) of these three things:
- CASH FLOW
Cash and cash flow can be taken to the bank. Appreciation…well, that’s more speculative. But appreciation has made many a millionaire. Just don’t plan on taking it to the bank next Friday.
Successful real estate investors want to know how much money the investment will cost, how much the investment will make and when the investment will pay off. The following formulas when applied correctly do all of that and more.
Using Formulas to Profit in Real Estate Investing
CASH FLOW: Income – Expenses = Cash Flow
Used by buy and hold investors to determine how much cash an income property will throw off each month. Calculating Net Operating Income (NOI) gives the true picture of cash flow.
THE 70% RULE: After Repaired Value – Expense x 70% = Maximum Offer on Flip
Used by fix and flip investors to determine how much to offer on potential flip
CAP RATE: NOI (Net Operating Income) / Sale Price = Cap Rate
Cap rate is used to determine the market value and risk profile of income-producing properties like apartment buildings and other commercial properties. For more, check out How to Estimate the Value of Commercial Property
The Bottom Line on Your Bottom Line
The bottom line is this. Know your goals, know your formulas, and never, ever let enthusiasm override sound decision-making.