To put this principle into practice, you absolutely must acquire knowledge in two key areas- market values and repair costs. While each of these is worth an article on it’s own, I will cover them briefly here.

First, market values. You must thoroughly understand the market values in the neighborhood where the property is located, so that you can project an accurate After Repair Market Value (ARMV). In other words, how much will this property sell for after all needed repairs and upgrades have been completed. While it is beyond the scope of this article to cover market value in-depth, I will simply note that the one best way to determine the ARMV of a residential property is to compare similar properties in the neighborhood which have sold recently (called comparables or “comps”).

If you don’t know the values in the neighborhood, STOP! Don’t invest there until you have come to understand the values by looking at lots and lots of properties, and talking with Realtors and others who know the neighborhood. Then you can proceed from a position of strength, certain that you know what you are doing.

Second, repair costs. Once you know the ARMV, you need to be able to work backwards to arrive at an offer that makes sense. To do this, you must know what any needed repairs and upgrades will cost you. You don’t need to know to the penny, but you must come reasonably close, and you can only learn to do this with experience. If you don’t have this experience, and you’re not an expert, hire one.

You will need to befriend a contractor you trust, or partner with one on a few deals. Either way, let someone who knows this stuff bring you up to speed. Get a contractor on your team.