I told him how many homes I bought that week and how pleased I was.
Then I was met with a look of concern on his face.
He said, “Oh now I guess you have to sell all of those.” It took a little of the wind out of my sails.
Why was I as a real estate investor so excited and why had the concern about selling them never entered my mind?
We real estate investors make our money on the front end of the transaction when we buy the house. That’s not when we get paid of course, but it’s when we make our money. When we buy a house correctly there is no fear of investing and not being able to sell or profit from it, and the risks are mitigated.
The buy is the critical component of the investing transaction, and when you do that correctly you are not worried about the back end, or the sale side, of the transaction. And that is, in turn, how you eliminate the fear or the risks.
How do you do it? Four key elements of the buy transaction that eliminate fear, risks and excuses.
No. 1 – Understanding what your investment is worth
The after-repaired value (ARV) is the first thing we figure out when we find a piece of real estate to purchase.
What is that property worth on the retail market, full-market value if repaired, updated and fixed?
What can we ultimately sell it for? The ARV is looking at comparable sales of like properties that have occurred with a recent period of time. The ARV is purely analytical. You can, with a very high degree of certainty, figure out what that property will be worth when you go to sell it.
Not a lot of speculation here, but purely mathematics using real data. In the real estate world we call those comparables. You nail that ARV definitively.
No. 2 – Focus on the repairs that are required
Repairs are also very analytical and calculated. If you feel expert enough to view the property and accurately estimate the repairs, great.
If not, have a contractor come in and tell them what you know you need to do to sell the house for full-market value and have them calculate what those repairs will cost.
We are not speculating or guessing. We have real numbers we are dealing with. We know what the house will sell for. We know what we have to put in the house.
The third component, then, is the price we pay when we buy.
No. 3 – What can we afford to pay for that property?
This price, once again, is very analytical.
A popular math formula many investors use is 70 percent of the ARV which we have already calculated as explained earlier.
Take 70 percent of the ARV and subtract the repairs and there is the cash offer or purchase price an investor can purchase for and make a realistic profit when it is sold.
No speculation. No guessing. No hedging.
No. 4 – Your exit strategy
A good investor knows, probably before they walk into the house the first time, what they going to do with it.
Are they going to wholesale it to another investor? Fix and flip it on the retail market? Are they going to keep it as a buy and hold rental.
Three very clear strategies without a lot of guess work – very definitive and very clear.
So you can quickly see how a professional real estate investor eliminates the risk by taking these four steps.
When you do those things you no longer worry about whether it is going to sell or whether you are going to make any money selling it. You did everything you need to do up front. There is no reason to fear.
Back to my friend and the conversation
As I thought back to my conversation with my friend, why was I not concerned about selling them?
That thought had not entered my mind. I was more excited that I had purchased them and bought them correctly. I had the confidence of an educated, professional and diligent real estate investor.
I made my money on the front end at the purchase. I will be paid my money on the back end when I sell them. But I am not worried about whether or not they are going to sell because I did things right up front.
This is how the myth that real estate is too risky gets debunked. When you do these things you will get the proper result in your real estate investment.
If real estate was that risky and unpredictable, it would not be the source of more millionaires in the US than any other form of investment. This many people would not have found this much success if that myth were true.