How Much Money Can You Make?
There are typically two types of investors;
We know a lot of investors and have clients that specialize in one category or the other. Both can make you a lot of money when done correctly.
An active investor is an investor who chooses to be more hands on in the buying, fixing, and selling (or renting) process. They buy wholesale properties that are in need of repair in which they increase the value through their own efforts, usually through the rehabilitation of the property process. It is not uncommon for them to have a construction crew or have a general contractor they work with that rehabilitates the property for them.
After purchasing the property the investor quickly begins the rehabilitation process. As they say, time is money and in real estate that is the absolute truth. The longer the property is vacant the more money you lose. Once the rehabilitation process is complete the active investor will then put the property on the market for sale to generate a quick profit or they may hold the property in their rental portfolio.
The first factor to determining whether to sell the property or rent is usually based on the investor’s cash position at the time of the sell or rent decision. (i.e. – If they are in need of cas they’ll sell for quick profit.) If they have liquid funds available then they may rent the property for positive cash flow.
The second factor an active investor should consider when determining to sell or rent is the property itself. What kind of neighborhood is the property located in, is it in a cul-de-sac or on a nice subdivision street, does the home have any functional obsolescence, will it be easy to sell. If it is, sell, if not, it may be an excellent rental.
Below is an example of an actual deal that has been completed and represents a typical transaction. A word of caution if you are new to buying, fixing and selling properties you will make mistakes on your first property that that you certainly won’t make on your 3rd. We have a lot of experience in this area and the example is based on an experienced investor and represents one who is interested in trading time for dollars by completing a buy, fix and sell property.
- Example 1:
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Property Address: 1234 Main Street
Phoenix, AZ
85200Property Information: Market Value: $225,000.00 Purchase Price: $172,000.00 Loan Balance: $160,000.00 Equity Spread: $53,000.00 Expenses at Closing: Down Payment: $12,000.00* Closing Costs: $600.00 Loan Costs: $1,000.00 Insurance: $500.00 Total: $14,100.00 Expenses During Ownership: Rehab Costs: $8,000.00 Holding Costs: $9,400.00 Property Taxes: $400.00 Sales Costs: $12,000.00 Closing Costs: $900.00 Fudge Factor: $2,000.00 Total: $32,700.00
* - Out of pocket expense that you get back at the sale of the propertyProfit Potential: $18,200.00
The passive investor is a different type of investor all together. They are much more hands off and are really not looking to get too involved with the property from a rehabilitation stand point. Cosmetic repairs are fine; paint, carpet, landscaping, etc. but any more than that and most passive investors will not buy the property and leave it up to an active investor to handle.
Most passive investors are looking for wholesale properties that can be bought at a discount and is already or very close to, rent-ready condition. Passive investors normally have a full-time professional job and don’t have time to manage a rehab project nor do they have the inclination to do so even if they did have the time.
They are looking for an investment that is hands-off and will provide all the wonderful tax benefits they desperately need. They will hire a property manager so they don’t have to worry about the management headaches or tenant hassles. They are looking for long term financing at the best possible rates. They want profits but are willing to wait and see profits through property appreciation, tax benefits and 1031 tax deferred exchanges.
Below is an example for the passive investor. This second example represents an investor who is looking for long term benefits.
- Example 2:
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Property Address: 6789 Main Street (Duplex)
Phoenix, AZ
85201Property Information: Market Value: $185,000.00 Purchase Price: $163,500.00 Loan Balance: $147,150.00 Rents: $1,650.00 Equity Spread: $21,500.00 Expenses at Closing: Down Payment: $16,350.00* Closing Costs: $650.00 Loan Costs: $1,850.00 Insurance: $500.00 Rehab Costs: $2,500.00 Total: $19,350.00 Expenses During Ownership: Prinipal & Interest: $1,103.63 Property Taxes: $60.00 Insurance: $70.00 Property Management: $165.00 Maintenance: $75.00 Total: $1,473.63
* - Out of pocket expense that you get back at the sale of the propertyMonthly Profit Potential: $176.38 Annual Profit Potential: $2,116.50 1st Year Return on Investment: 122%
The return on investment calculation is based on the annual profit potential plus the immediate equity at the time of purchase. We have not factored in any appreciation or depreciation that an investor would receive. Therefore the 1st Year Return on Investment calculation is understated.
