I previously covered the two most well understood profit centers in rental properties (#1 here and #2 here). This post will quickly explain a less obvious profit center that happens before we even take possession of the property! Who doesn’t like instant returns??

Instant Equity: the positive difference between the MARKET VALUE and PURCHASE PRICE of the property.

I emphasize market value and purchase price because I don’t want anyone to get confused. If the asking price of a property is $350,000 and I negotiate a sale price of $325,000, did I earn $25,000 in instant equity? Maybe, but not necessarily.

If the value of the property is only $330,000, then my instant equity is only $5,000 since I only purchased the property for $5,000 under the market value of the property. Conversely, if the market value of the property is $375,000, and the seller wanted a quick sale and asked for $350,000, then I actually made $50,000 in instant equity ($375,000 – $325,000). This is assuming I can get full market value when I decide to sell. As we know, real estate has generally increased in value over the long term, so this should be a true realization.

Therefore, it’s always important to understand the true value of the property when entering negotiations. Just because I get the seller down $50,000 from their asking price, doesn’t mean I got a good deal. Also, acquiring a property for the asking price does not mean you got hustled either. Maybe the seller doesn’t know the true value of their property (happens more often than you may think) and you want to acquire the property ASAP before another savvy investor scoops it from underneath you, so you offer the asking price and avoid back and forth negotiations. This also helps reduce the chances bidding wars.

In summary: always try to “earn” as much instant equity as you can when negotiating with the seller. This adds to your bottom line and ROI when you sell, but also reduces your debt servicing, which directly increases cash flow.

Keep an eye out for Profit Center #4 coming soon!

Stay strong.