Everything you do in the real estate investing business is based on numbers. The more efficient you are in determining and deciphering numbers, the better deals you will get involved in. Ultimately, better deals will result in more money. Running numbers is much more than knowing how to plug numbers into a calculator. You need to know costs, expenses, projections and estimations. If you overlook even one item, it will have an effect on everything else with the deal. Learning what numbers to look for on every deal takes time, but it is the most critical aspect of the business.
There are many good spreadsheets and programs that can help you run the numbers, but you have to put the right numbers in. Many times an investor will overlook all of the expenses involved in a rehab deal and when they walk away with much less than they anticipated, they are shocked and disappointed. Everything from taxes, insurance, utilities and other holding costs have to be accounted for. You can get a great deal on the buy side and have an end buyer lined up, but in order to know what number to sell for you need to be accurate with all of your numbers.
In order to get comfortable with the numbers, you need to look at every step of the process. Start with the property and look at comparable sales or listings. See what the subject property has that ones in the area may or may not. This is an exercise you can practice whether you have deals pending or not. Your realtor should be able to provide you with a listing sheet that will have all of the pertinent information about the property. This will help you down the road, as you will know what to look for on the buy side and what you may be able to sell for.
From there you can move onto specific expenses related to the property. Look at your spreadsheet or program as a guide, but also talk to your realtor and fellow investors who are in the business. Ask questions about every expense until you know what they are for and if they are justified. Take a walk around Home Depot or any other home improvement store and get an idea of just how much certain items cost. You may not know what to do with some of the materials, but at least you will know their cost will be.
Finally, take a look at seemingly miscellaneous expenses such as commission and other closing costs. If you have ever closed a real estate deal, go back and look at the HUD 1 settlement statement. This will have all of the costs and expenses from the closing broken down and easy to read. These costs will often come as a shock at the closing if you do not know exactly what they are and how much they cost. Tax escrows, attorney fees, lender fees and insurance costs can add up very quickly.
Knowing what the numbers are, where they come from and what they will be moving forward is the backbone of the investing business. The best investors know this and constantly look for situations with these numbers in their favor.
Read more: http://www.fortunebuilders.com/running-numbers-real-estate-deal/