Real Estate Blog

Ask anyone that is an investor of real estate and they will tell you about how they were burned on a deal, missed a opportunity, or lost a lot of money due to ignorance of not understanding what they were doing.  As I once heard the world renowned speaker Zig Ziglar say, “If you haven’t failed at what you do, you will never succeed” - simply put, failure teaches us how to learn from our mistakes and correct our errors.

Being able to calculate risk takes many years to fully understand and apply, but I would like to take this opportunity to give a bit of insight on how you can start to think critically and apply risk management techniques to your real estate purchase.  Properly evaluating your risk will give you the pretense for prevention and ultimately lower your risk of failure.

In real estate investment, the ultimate goal should be to profit on purchased and controlled assets.  To do this, you need to be able to both successfully and consistently acquire and sell your investment for profit.  The only way to do that is to be able to recognize value, acquire it at a substantial discount, and sell it under desirable conditions.

Recognizing value is an essential factor in being able to profit on investment.  To evaluate value, you must know the market area of the property in question so you can provide a comparable market analysis of the property based on location and recent home sales, be able to inspect the property with reasonable knowledge of most aspects of basic home repair and be able to appraise the value of the home and its amenities.

Once you have developed the ability to determine what the value of a investment is to you, your finally ready to manage your risk.  In managing your risk, you are essentially accounting for all scenarios that will affect your purchase price, cash flow during asset holding and the pre-determined exit strategy.

The purchase price should be determined by using the following:

• Current Home Value
• Closing Costs
• Determination of Rents Based on Debt Service and Expenses
• HOA and Utility Fees
• CMA of Current and Repaired Market Value
• Title and Encumbrance Search
• Repair Costs
• Analyze List Price /Sales Price Ratios
• Obtain Property History Report
• Determine what your Profit Must Be
• Pre-determined Cash Flow analysis

The cash flow analysis of your investment should have accounted for the following:

• Home Owners Association Fees
• Interest Rate
• 10% Property Management Fee
• 10% Rent Loss
• 5% Maintenance Fee
• 5% Marketing Fee
• Principle, Interest, Taxes and Insurance
• Down Payment
• CMA on What the House Will Rent For

The exit strategy should be determined before you even buy the house and depending on whether it is long or short term holding, the following should be evaluated in your selling price:

• CMA on Retail Market Value
• Holding Costs for 3 Months (PITI x 3 Mos)
• Realtor Fees (6% of Sale Price)
• Marketing
• Closing Costs (3-5% of Sale Price)
• 1031 Exchange

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Calculated Risk is an asset to any investor and is used by most all good investors alike.  Being able to calculate your risk into your purchase price, holding costs and sale will allow you to maximize your profit potential and ultimately help you to be successful as a investor.