FAQ: Am I making a good investment in buying this fixer upper? rental?

Ah, this is the age old question for many investor wannabe's.  Even for those who are seasoned, this question respects no one and must be answered by all who pose the question .. "Am I making a good investment in buying this fixer upper?"  Am I making a good investment with this rental?"  So what is the right answer? How do I know when I am looking at a property and comparing it to other relevant properties that it is a good deal for me?

Step 1 - Determine what your profit margin will be.  This is the biggest deciding factor for you to make in making an investment decision.  Before you decide that you want to invest, establish in your mind your minimum profit margin.  This is like going grocery shopping without a list and on an empty stomach.  It is most beneficial to know that you have a deal when you have identified what you are looking for PRIOR to looking.  Most investment projects have a minimum of 30-45 days to close on the purchase and a minimum of at least 6 months (title seasoning requirement that disallows a seller to sell a property in less than 6 months of prior ownership) prior to selling what the fun project that you got yourself into.

Step 2 - Determine how big a risk you are going to take.  This is a two part step: determine your price range and what three risks to the project will be.  When you determine your price range, you are also looking at how much you are willing to lose if it doesn't turn out to be what you originally expected.  There are some investors who are comfortable purchasing a $400K property putting $100K and selling it for $650K.  

• Can you float $3000 per month for the mortgage and utilities for 6 months?  
• What happens if your timeline goes to 8 months or 12 months? 
• When will you attempt to lease the property the property doesn't sell when you want it to?

Step 3 - Determine your exit strategy.  Your purchase should be profitable based on good numbers not on selling the property at the end where you are trying to time the market.  That would be like buying Google stock and hoping it would go up in six months.    Purchasing an investment property should be profitable with conservative estimates on the repair/remodeling and holding costs for the long term.

Step 4 - Ah grasshopper, be patient.  Do not base your decisions on being wealthy overnight. Real estate is a long term assets equals long term wealth strategy.

I have attached a helpful tool in making this decision.  It is a spreadsheet that has the following formula

Click here to download tool. 

Final Sales Price

- Marketing Commission

- Holding Costs

- Cost to Change

- Profit

Maximum Purchase Price

The formula is really easy to understand and to use.  Just fill in the blanks and voila it will tell you if this is a reasonable investment.  You may need some help in calculating the cost to change or remodel a property as well as the time to market should you want to sell at a later time.  Consult with a local remodeler and confer with other colleagues to check your numbers.  And by all means, be conservative with your numbers.

What are some of your ideas and thoughts regarding investing?  What are some additional insights do you have?