Real Estate Profit Margin Sweet Spot
Our aim affects everything we do in life. By “aim,” I mean any time we work toward a goal.
When we focus on hitting specific goals, we’re much more likely to get the results we’re looking for. Our chances of achieving success increase even more when we start by choosing the right goals to aim at.
For REIs, the first part of every fix and flip is to find the right real estate property in which to invest.
I have a simple formula that I want to share with you that will help you focus your property-finding goals on the areas where you chances for success are the highest. I call it the “Price/Profit Sweet Spot.”
This is one of the tips from my own experience and research that I share in my VIP membership program, and you’ll probably notice that it’s different than a lot of the other advice you’ll find out there.
Where You Need to Aim
When searching for fix and flip properties, you want to focus your attention on properties that meet both of these criteria:
- Properties between $50,000 and $200,000 ARV
- Deals with a profit margin of about $15,000 and/or 10% of ARV
Now it’s time for me to explain why the sweet spot is the sweet spot …
“Going for Broke” Usually Delivers Exactly That
Shooting for just a few deals with big payoffs — for most REIs — will lead to disaster.
This is partly because there just aren’t enough of those kinds of deals out there for every REI to have equal access to them. You would be lucky if you got one or two big ones in your entire investing career.
Lots of REI gurus and coaches out there lure potential new REIs into the game with promises of HUGE profits on individual deals, usually deals targeted well above the $200,000 ARV range. Profit margins for deals like these can be 20% or higher and can reach up into the $50K+ net range.
I have actually shared a few similar success stories in the case studies section of my site. They certainly inspire me!
But I try to report on both sides of this truth. Yes, deals like these exist, but your best chance to make money in real estate means consistently aiming for deals in the sweet spot.
And then if a huge deal happens to come your way, you can jump on it (and you certainly should).
The Sweet Spot is More Predictable
Predictability is the other reason that makes the sweet spot the sweet spot.
Homes above the $200k range are statistically more likely to experience drastic fluctuations in value. This is particularly true of any home in the $200,000 – $5,000,000 range.
Homes in this range are more susceptible to all kinds of depreciation, including local area depreciation and overall market depreciation, while homes in the $50,000 – $200,000 remain much more resilient to these influences.
With this strategy, the chances of getting into a high-dollar deal only to lose equity in the property before you have the time to flip it are much higher than with sweet spot properties.
If REI Were Golf …
If REI were golf, only going for the big deals would be like only driving for a hole-in-one on every hole.
Sure, you might eventually get that hole-in-one, but at what cost? And what would your overall score look like at the end of the game (or season for that matter) compared to the scores of all the other players who were consistently making moderate drives right up the middle of the fairway?
Trust me on this one. If you want your investing to build you the wealth that you’re hoping it will, aim for the sweet spot every time.
If you’re looking for a rush, you’ll get that rush a few deals down the road when you take inventory and realize that consistently following solid, moderate deals has helped you amass a pile of capital.
If you’re STILL such a big thrill-seeker that you just can’t wait until that happens, I’d suggest — for the sake of your finances — taking up squirrel diving or something like that in the meantime.
To the Sweet Spot!