When considering making an investment in real estate, many new investors struggle with what to offer. Part of the challenge for them is deciding what their exit strategy will be. In other words, will they be purchasing the property and then immediately reselling it? Will they sell the contract before they even close? Will they be buying it to rent and hold long term?
Not knowing what you ultimately want to do with the property makes it extremely difficult to structure an offer to purchase.
This is actually a challenge we had when modeling the how to make purchases of real estate in our Learn To Be Rich investment game. Here’s how I handled it.
To simplify the process, we divided purchasing real estate into two major categories: buying for equity or buying for income.
Buying for equity is purchasing the property at a discount from the current fair market value. This is usually when you are buying a house to fix up and resell.
Buying for income is purchasing the property based on the payments and expenses you will incur when you hold the property as a rental. It also includes assessing the income that the property will produce. This analysis is typically used when you will be holding the property as a long-term investment.
By simplifying the process, investors can now decide whether they are buying for income or equity. It makes it much easier to recognize a good deal with this clear-cut criteria.
For example, if an investor is buying based on equity and he wants to make $10,000 on the deal, he can easily calculate what he can afford to pay for the house in order to net that amount in profit.
On the other hand, if an investor is buying based on income and he wants to make $100 per month, it is just as easy to calculate what his payments and expenses will be. By getting an accurate estimate of what the rental income will be, you can then reverse calculate the price you can afford to pay by using current interest rates in order to have the desired monthly payment amount that makes the property cash flow.