If I had to guess, there are a lot of investors out there who’ve lost money on a deal at one time or another. I did. It was early on when I thought getting the deal of a lifetime meant buying a house for 10% less than the asking price. (Go ahead and laugh.)
However, after that incident where I lost a lot of money, I decided I needed to figure out what in the heck I was doing and how this whole real estate business was actually supposed to work. Luckily, since then, I haven’t had any problems and I’ll tell you why in a moment.
But I hear stories of investors who just can’t seem to catch a break. Who seem to always have “bad luck” and can’t get a deal to work right, etc. etc. etc. Let me tell you why this is.
Some real estate investors always fly by the seat of their pants. They have no standards when it comes to evaluating deals. Earlier this week I was talking with an investor who has supposedly done multiple deals and he was asking me how much money he should try and make when doing a sub-2 deal or a lease option deal.
He really had no clue and it was obvious he’d take any deal he thought he could make money on whether it was a $3,000 profit or a $50,000 profit. And it’s this type of thinking that gets investors in trouble and why people constantly lose money in this business.
Here’s a way to think about it: With the economy and credit crisis, almost every bank has tightened their lending standards. If you want to get a loan from them you have to have an 800 credit score, make $250,000 a year in income, have assets of $10 million and give them your first born child.
In other words, they have strict standards on who they’re going to lend to. And you need to have the same standards when you’re buying houses from someone. So what are some of the standards I use personally?
Well… with a wholesale deal I have to be able to make $5,000 minimum.
And I run my numbers very conservatively to make sure that’s a worst-case scenario. I don’t simply guess and hope that I’ll make that amount of money. If I’ve run my numbers and it doesn’t appear I’ll make that amount, then I’ll just move onto another deal.
With sub-2’s and lease options I want a profit of $30,000 on the back end when the property sells. Of course it has to have positive cash flow too. If the property won’t make $30k I won’t do it, because there’s just too much risk. If some new investor did a lease option deal expecting to make $5k, they could easily see that profit disappear in a flash.
Now, when I give the two numbers above to new investors they think “ohh my gosh, that’s too high, I’d be happy just making $1,000 on a deal.” Well, remember, if you expect profits of $1,000 you may get nothing or even lose money. But if you expect profits of $30,000, you’ve got a lot of money built in for any mistakes you might make.