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This article, excerpted from the best-selling Real Estate Investing Business Plan, breaks down the costs associated with buying, rehabbing and then reselling the property. The business model is based on buying rehab properties at wholesale prices. The worksheet helps determine the maximum amount we would pay for a property and how much net profit we'd realize if we rehabbed and then resold the property. Knowing this information is critical in deciding whether to purchase any property. The decision to buy and sell a real estate investment property is based on an evaluation using SamplePlan, Inc.'s Maximum Purchase Price© worksheet, found in the Real Estate Investing Business Plan. Using the worksheet for each property allows the buyer to apply a formula-like approach in an effort to consistently generate positive net profits. The worksheet breaks down the decision-making process into a simple formula. Applying this formula to each property that a buyer is considering purchasing provides a framework in which to make smart decisions. In this section of the Real Estate Investing Business Plan, we'll break down the worksheet and explain how each part functions. As with all forecasts, this example is based on estimates in round numbers. Actual numbers always vary for each property. How To Use The Worksheet To Make Smart Real Estate Investment DecisionsThe worksheet consists of thirteen simple areas, labeled as Sections A through L. The premise of the worksheet is straightforward. First, we estimate the price at which we realistically could resell the property. We refer to this as the retail value of the property. After estimating the retail value, we then forecast the property's net profit potential by subtracting all costs associated with acquiring, rehabbing, reselling, and profiting from the resale of the property.The number we come up with is the maximum amount we would pay for a property, which we refer to as the wholesale price. Let's review each section: Section A: Property Address In the first section, we simply note the address of the property:
Section B: Comparable Property The next section notes the best comparable property that's sold in the neighborhood in the last few months. This information is generally found in the regional Multiple Listing Service (MLS), which can be accessed by a Realtor. The information includes the comparable property’s address; the square footage; the price for which the property sold; and the subsequent cost per square foot. The cost per square foot is the price the property sold for divided by the square footage of the property.
Section C: Estimated Retail Price The Estimated Retail Price is the price at which we expect to resell the property. We multiply the target property's square footage by the cost per square foot of the comparable property to find our target property's cost per square foot and likely retail price. In this example, we multiply the target property's square footage of 2,000 by the comparable property's cost per square foot to find the target property's likely retail value of $300,000.
Section D: Costs to Purchase We then estimate the costs to purchase the property. We do not include the actual down payment or earnest money deposit. We'll include that later in our out-of-pocket expense. Again, these numbers are estimates and will vary for each property.
Section E: Rehab Costs In the next section we estimate rehab costs, based on our initial walk-through of the property.
Section F: Holding Costs We then estimate the holding costs for the amount of time we'll own the property.
Section G: Resale Costs Then we include the costs associated with reselling the property for an expected sales price of $300,000.
Section H: Contingency We always plan a contingency to help cover unexpected expenses. The contingency becomes part of the net profit if it isn't used.
Section I: Profit Requirement Most importantly, we include the amount of net profit we require to make pursuing the property worthwhile. The profit is based on a percentage of the expected sales price, which we've set at $300,000.
Section J: Maximum Purchase Price We refer to the Maximum Purchase Price as the wholesale price of a property. After subtracting each cost from the expected retail value, we arrive at our maximum purchase price. This is the amount we offer to the seller and never more.
Section K: Out-of-Pocket Costs We estimate the Out-of-Pocket costs to acquire the property.
Section L: Investor Payback and Company Net Profit We then determine the investor’s payback and the Company’s net profit. Until the company has a positive cash flow, we either provide the out-of-pocket expenses for each property acquisition through loans to the company from the owners or from outside investors. We repay the loans when the property is resold for a profit. The total investor payback equals the amount loaned for out-of-pocket expenses. The money left over after we pay ourselves back remains in the company to be used toward the next acquisitions.
By applying the principles found in this worksheet, you can estimate the amount of profit you might realize before you purchase a property. You may even find that the payback is not worth risk of making the purchase. Evaluate each property carefully before investing. I wish you the best of success in your venture. Cynthia K. McCahon SamplePlan, Inc. ©SamplePlan, Inc. All Rights Reserved.
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