One of the first things I learned in property investing was that you make your money when you buy, regardless of whether you are buying a rental or flipping a property. Where investors usually go wrong is they buy a property at market value, which leaves little to no money in the deal.

Scenario 1: Flipping a Property Bought at Market Value

Let’s imagine an untrained investor wants to flip a property for profit. Due to his lack of education he gets seduced by the estate agent who confidently tells him this 1-bed property in Fourways can resale for R1.5 million with some minor renovations.

He ends up buying the 1-bed for the asking price (which also happens to be the market price for the property) at R1.2 million. He thinks he can buy it for R1.2 million, renovate for R40k and make a profit of R260k. He’s just bought a liability.

Let’s look at the numbers:

1. Purchase Price: R1 200 000
2. Buying Costs: R60 000
3. Refurbishment Costs: R40 000
4. Holding Costs: R28 000
5. Selling Costs: R72 000
6. Total Cost of deal (1+2+3+4+5) = R1 400 000
7. Resell Value (“Fair market value”): R1 200 000
8. Profit / (Loss): (R200 000)

Scenario 2: Flipping a Property Bought Below Market Value

What the trained investor will do is buy well below market value and thus buy the profit from the beginning. The savvy investor will buy the property at R900k.

Look how the numbers change now:

1. Purchase Price: R900 000
2. Buying Costs: R40 000
3. Refurbishment Costs: R40 000
4. Holding Costs: R28 000
5. Selling Costs: R72 000
6. Total Cost of deal (1+2+3+4+5) = R1 080 000
7. Resell Value (“Fair market value”): R1 200 000
8. Profit / (Loss): R120 000

Making deeply discounted offers can feel awkward at first, but you have to get comfortable with it. Backing up that discounted offer with your numbers will build your confidence when putting low offers forward and it’ll show sellers that you aren’t some greedy low baller. You are a professional property investor. I’ve avoided being told to go to hell just because I could logically and factually explain to the seller why their property can’t sell for their requested amount. They won’t always accept your offer, but they’ll respect that you aren’t making baseless offers that seem to only be interested in taking advantage of their situation.

I encourage you to educate yourself and become a savvy investor. That way you’ll know how to do the numbers correctly and make your money when you buy.

If you need a tool to help you do the numbers correctly, checkout My Property App. It is a web-based app that allows you to analyse buy to let, buy to flip and multi-let deals with enhanced confidence and choice.