I have written before on real estate investor mistakes, and one of them is worth expanding on. It is little discussed, but if an investor buys a property for rehab and resale, there is more than a simple margin to be focused on. The investor should also be guided by a realistic timetable.
All too often, I see amateur investors holding out for a price no matter how long in takes. This is a huge mistake for 2 main reasons: the cost of carrying the property, and the opportunity cost of not turning the property over in a timely fashion.
Carrying costs kill profit margin. The property taxes in Westchester are the highest in the nation. A medium home worth $500,000 can have property taxes of $15,000 or more. Holding that property for 6 months is $7500 in taxes. Holding that property for a year-far too long-can eat 3% of the value. Taxes aren’t the only incemental cost- utilities, maintenance and snow removal not only cost the checkbook, they can ad stress as well.
Opportunity cost is by far the silent killer. There are two types of opportunity costs I see that neophytes seldom consider. They are the cost of money, and the cost of lost deals if you hold on too long.
The cost of money is often simplified into the interest on borrowed money, but it can also be interest lost when the investor pays cash. If you put $400,000 cash into a house, you are taking it from an interest-bearing instrument like a money market or cash account and put it into real estate, which pays no interest. If that fund pays 3%, interest lost on a price of $400,000 over a year is $12,000. If you borrow $400,000, interest can be double or triple that amount, making that hour glass a real source of angst if you don’t move the property.
The cost of a lost deal is another casualty of hubris. I recently interviewed an investor flipping their first house. When I told them what I thought the home would sell for, their emotion at the quote was palpable. I wasn’t hired. They still haven’t sold, and appear to now be chasing the market. Even if they get lucky and sell at the end of the year for an amount higher than I quoted them, they still lose. Why? Because the incremental amount they held out for is dwarfed by the money they’ll never make had they turned the property over in a timely fashion and parlayed it into another opportunity.
All too often, newer investors make the fatal mistake of holding out too long for a home run on every deal, when a good solid double in a shorter timeframe would keep them profitable and healthy. That can be disasterous. Remember, with the gigantic numbers we are throwing around in Westchester and the New York area, mistakes cost a king’s ransom. Tens of thousands, sometimes 6 figures.
Time is money. You can make money back with prudent future transactional strategy if you don’t hit a home run on a deal. But you can never, ever get time back.