The excerpt describes a real estate investment company’s approach to estimating the potential net profit of any property before purchasing the property…
How To Estimate Profits Before Buying Real Estate Investment Properties
The decision to buy and sell any property is based on an evaluation using the company’s Maximum Purchase Price worksheet (included in the Real Estate Investing Business Plan). Using the worksheet for each property allows the company to apply a formula-like approach in our 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 we consider purchasing provides a framework for the company to make its real estate investing decisions.
In this section of the business plan, we’ll break down the worksheet and explain how each part functions. Of course, as with all of our forecasts, this example is based on ballpark estimates. Actual numbers always vary for each property.
How the Maximum Purchase Price Worksheet Works
The 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. Again, the business model of the company is to only buy properties for wholesale prices, then either resell the properties at retail prices or hold the properties as long-term rentals.
The worksheet contains inputs for the following sections:
- Property Address
- Comparable Property
- Estimated Retail Price
- Costs to Purchase
- Rehab Costs
- Holding Costs
- Resale Costs
- Profit Requirement
- Maximum Purchase Price
- Out-of-Pocket Costs
- Investor Payback and Company Net Profit
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