Calculating Returns is Pointless... If you skip this step

[Matthew Irish-Jones]

Decided to post since I keep seeing the same mistake.  Its almost always from new investors.  Please don't make this mistake you will pay for it.

Step 1:

You are interested in Real Estate, want to live off of passive income and start calculating how much you need to replace your day job

Step 2:

You become a super genius and see opportunity everywhere.  There is $2000 in monthly income on a double, all you need is 3-4 of these and you are home free.  You cannot believe this gem has been sitting on the market for two weeks, its all yours to buy.

Step 3:

You buy, you fail, you sell at a loss.

Critical Error:

You actually missed Step 1.  Step 1 is classifying neighborhoods by their risk profile.  You or someone with more experience than you needs to be able to understand if you are buying an A,B,C or F class asset.  Please note this can be subjective so: Caveat Emptor to you.  

If there was ever a cliche in life that were true, its Location, Location, Location.  There are properties I can give you for free that you would lose money on.

The profit and loss calculations are the third most important thing to be able to calculate, Location is first, asset condition is second.  You cannot possibly know whether you are buying a good deal or a bad deal if you do not know the classification of the neighborhood.  Until you have made this Step 1, you will either fail, or get lucky and succeed on a deal or two.

Returns are generally the inverse of risk.  Newer investors with lower cash reserves are the ones that can least afford risk.  If your agent cannot off the top of their head give you a risk profile for the area, and is not adjusting your variable costs based on the neighborhood, you need a new agent.