Make Your Profit Before You Close
With over 40 years of real estate development experience, completing over 100 residential units and working with over $100 million in real estate project funding, Brian Barbuto knows a thing or two about what it takes to be a successful investor. In our recent conversation, Brian provided his Best Real Estate Investing Advice Ever – make your profit before you close.
If you have any amount of real estate experience, I am sure that you have heard this advice before. However, it is an easy insight to forget, especially for newbie investors. Always remember that your profit is made when you start the real estate process, not when you exit it. Obviously, you have to build your expectations around the exit strategy. But, before committing to any investment, you have to look at it from the level of the “buy.” The best exit strategy is almost meaningless if you neglect to buy the property at the right price and terms.
Make Your Profit on the Acquisition
Technically, in regards to creating equity, when buying real estate there are really only two possible scenarios:
- Immediately generate equity
- Potentially generate equity after doing something i.e. development, rehab, etc.
According to Brian, if you find yourself in the second situation, it is not a good deal. However, if you find yourself in the first situation, than it is a great deal. This is a fairly straightforward rule of thumb to follow.
Every time that Brian closes escrow on an acquisition, he makes money. Brian project plan’s day 1 is not the day of closing like most investors. Instead, most of the work is done while he is in escrow. As a result of this pre-close planning, when he buys something, the minute he closes escrow, the property value is substantially higher than what he paid for it.
Follow in Brian’s footsteps and focus on figuring out how you can always make your money in the acquisition. Take your time. Get your planning in place as early as possible so that if you decided to sell the project the day after closing, you could make a profit.
How Much Equity Is a Good Deal?
There is not an ideal “percent equity” that you want to achieve to make sure that you have a good deal. Every deal acquisition is different. For example, let’s say that you are conducting your due diligence on a property listed at $900,000. It requires zero renovations, but you have a buyer lined up that is willing to purchase the property from you for $1.2M. Therefore, you come up with 2 different offers:
- Offer #1 – $900,000 all cash
- Offer #2 – $1M, buyer carries 90% of the financing, you bring $100,000 to the table
The better offer really depends on your current real estate strategy and goals. However, even though Offer #1 will result in a higher net profit ($300,000), Offer #2 results in a substantially higher ROI (200% vs. 33%) and comes with less risk ($100,000 down vs. $900,000). If you were the buyer, which offer would you prefer?
The point is that the deal structure and terms are always different; therefore, the expectations and returns are always different. But regardless, the main principal is always the same: make your profit before you close.