When considering making a real estate investment, 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 buy the property and then immediately resell it? Will they sell the contract before they close? Will they buy it to rent it and keep it for the long term?
Not knowing what you ultimately want to do with the property makes it extremely difficult to structure a purchase offer.
This is actually a challenge we had when modeling how to make real estate purchases in our Learn To Be Rich investing game. This is how I handled it.
To simplify the process, we divide the purchase of real estate into two main categories: purchase for equity or purchase for income.
Buying for equity is buying the property at a discount from the current fair market value. This is usually when you are buying a house to fix it up and resell it.
Buying for income is buying the property based on the payments and expenses you will incur when you own the property for rent. It also includes evaluating the income the property will produce. This analysis is generally used when the property will be held as a long-term investment.
By simplifying the process, investors can now decide if they are buying for income or capital. It makes it much easier to recognize a good deal with this clear criteria.
For example, if an investor is buying on the basis of equity and wants to make $10,000 on the deal, they can easily calculate what they can afford to pay for the house to earn that amount of profit.
On the other hand, if an investor buys based on income and wants to earn $100 per month, it’s 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 reverse the calculation of the price you can afford using current interest rates to have the desired monthly payment amount that gets the property cash flowing.