People become real estate investors for many different reasons, but the number one reason people get into real estate is to make a profit. Everyone wants to make more money in their business. Unfortunately, the margins on deals have become skinnier and skinnier nationally. If each deal generates a smaller profit, then we must do more deals to make the same amount of money. This forces investors to become hyper-focused on deals. I constantly hear investors compete and compare, “I do 50 deals a year,” or “I do 100 deals a year.” Closing a high number of deals each year is fantastic, but the better question is how much profit are you making on each deal?
Knowing your numbers is key, so it is time to calculate the varying profit margins on the different deals that you do. I regularly do this exercise myself and it is eye opening. Here is what I do step-by-step.
First, I list all the deals that I have done up to the current date with two important data points attached: the amount of profit I made on the deal and whether I enjoyed working with the seller. Both factors are important to me. I want to make money and I want to have fun, but to start I focus on the money factor.
Next, I take this list and narrow it down to the most profitable deals. Now, it is important to note that I can consider profit in terms of both finances and time. If two deals make $10,000 or two deals make $20,000, they do not make the same amount of money because each deal carries a different amount of stress. Ensure that when you are going through your deals you are evaluating the true (financial) profit per deal, while also considering how much time and energy you spent on the deal. Do not neglect to measure your return on time investment (ROTI). To me, ROTI is the most important metric because time is a finite resource.
Why is this exercise worthwhile? If we aim to be super profitable in our business, we need to focus on the deals that are the most lucrative. With data in front of us we can now look for themes and trends. What do your best deals have in common? Is it a certain location? Is it a certain age of house? Did they all come from the same type of list? The goal is to identify the aspect(s) of the deals that trend toward higher returns and then figure out a way to scale up and replicate them. Instead of just scaling up the number of deals overall, we can scale up the most profitable deals. This will allow us to reach our goals much faster.
Before I completed this exercise, I thought I already knew where my best deals came from, but it turns out that I was totally clueless. I was surprised to find that my deals that were two to three times more profitable than the rest were the ones involving Senior homeowners. With the data in front of me, I finally started putting the pieces together. It made a lot of sense logically. Seniors usually own their house outright. They have a lot of other needs and therefore are less price sensitive. Generally, a Senior will have bought the house so long ago that they no longer have skin in the game making them amenable to any offer that seems fair. This is vastly different than working with a seller who just bought a house two years ago and is much more attached to it. Trust is another important factor in closing profitable deals. Seniors tend to be slow to trust, but once you earn it, they are very loyal.
All these reasons contribute to making these types of deals more profitable for me without taking advantage of these folks. I love a home run deal, but I do not ever want to take advantage of people. Seniors need so much help and therefore I can create a lot more value for them, leading to win-win deals for all of us. Now, this may not be the niche for you, but I guarantee you can identify a type of deal that works best for your market and business.
If you are on the quest to scale up your deals, remember that you can complete fewer deals but make more money if you strategically choose deals that are more profitable. Factor in both financial profit and time freedom. Your happiness is just as important as your bottom line.