If you live in the home for at least two years, up to $250,000 of the profit ($500,000 for a couple filing jointly) may be tax free, as discussed previously.
You’re onsite for any repairs or renovations you have to hire out. And you’re around more often to prevent thieves from walking off with your tools and materials.
If you’re single or married with no kids, this strategy is an excellent choice. If you have children in school, however, I recommend that you avoid this approach, unless you intend to remain in the same school system after selling. Your children begin to form relationships, and big moves disrupt their lives.
Buy, hold, lease
You don’t have to sell a house to profit from it. Many real estate investors opt to buy a house and lease it out for at least enough to cover the monthly expenses of holding it — mortgage, insurance, taxes, maintenance, and utilities. Here’s a rundown of how this strategy works:
You buy the house at less than market value so that you earn equity at the time of purchase. In other words, if you buy a $100,000 house for $80,000, you immediately earn $20,000 in equity. You don’t realize your profit until you sell the house, but you can borrow against the equity.
Assuming that the rent you charge covers your mortgage and other expenses, the rent pays down the principal of the loan, so your equity in the home gradually rises. (Your renters are paying off your debt.)
As real estate values rise, your equity in the home rises accordingly, so the house is worth more when you sell it — assuming, of course, that your tenants don’t trash it.
In short, you’re making money in three ways: when you buy the house, when you hold the house, and when you sell the house. If you perform some value-added updates and renovations while you own the property, you may increase your profit even more. Of course, with this strategy you don’t see the immediate influx of cash that accompanies a quick flip, but your net worth (the value of your assets minus the amount you owe on those assets) gradually rises until you cash out your chips at the end of the game.
See Chapter 20 to find out more about the various approaches for profiting from real estate investments.
Invest in new construction
A home doesn’t have to be old and dilapidated for you to flip it. Many real estate investors profit from flipping new homes or condos. Unless you’re focusing on a niche market that rules out new construction (see the later section “Focus on a niche market”), don’t overlook newly constructed homes.
The best time to hit newly constructed homes is at the beginning, when the builder first starts to sell units. After 60 months of construction, the cost to build may have risen substantially, so if you bought at the beginning, five years later you have that extra equity built up in the property compared to the other homes in the division.
In October 2020, my wife and I decided to downsize. We signed a purchase agreement to buy a detached condo to live out our retirement days in a space that worked for us. Within six months, the value of the property increased over $200,000!
Conditional clauses: Make sure that the purchase is conditional on the satisfactory completion of the building and on your ability to secure financing for the purchase. If you sign a purchase agreement and then are denied financing, the builder may keep your earnest money and perhaps even sue you for breach of contract.
Inflated profit estimates: Beware. You’ve probably heard stories of people who invested in a development and made $100,000 in short order. What you don’t hear are the stories of people who lose money, and those stories are much more common.
Variable building costs: Some contracts include language that allows builders to charge a variable amount — for the price of materials, for example. That variable amount could end up costing you double your investment (or more) if the cost of materials rises substantially, as it did during the COVID-19 pandemic.
If, after doing your research, you’re convinced of the benefits of investing in a new construction project, make sure you’re among the first 10 percent of buyers. These buyers make the lion’s share of the profit because, as construction proceeds, building costs rise. To find out whether you’d be in the first 10 percent group, ask the salesperson, who’s usually camped out in the model home, the number of total units planned and the number sold, and then divide the number sold by the total number of units planned.
Focus on a niche market
When you’re looking for properties to flip, the first impulse is to cast a wide net in the search for the best deals, but sometimes you can find better deals by fishing deeper in one spot, such as one of these:
Foreclosures: You can find more homes in foreclosure than you can possibly flip, and by focusing your efforts on these properties, you quickly discover the ins and outs of locating them and effectively negotiating the price and terms you want. See Chapter 7 for details about foreclosures.
VA foreclosures: To narrow your scope even further, consider focusing on Veterans Affairs (VA) foreclosures.
Probate: You can find leads from probate lawyers and the neighborhood grapevine to locate families who need to unload a house in order to settle an estate.
Divorces: When couples divorce, they’re often stuck with a home that neither of them can afford. By keeping your ears open and letting people know that you buy houses, you can often score first dibs on these homes.
HUD homes: Working with an agent who specializes in US Department of Housing and Urban Development (HUD) homes, you can build a career by purchasing these homes at a discount and rehabbing them for quick, profitable sales.
For Sale By Owner (FSBO): When everyone else is searching the MLS for deals, you may prefer driving around the neighborhood and looking for homes with a For Sale By Owner sign on the front lawn or searching for the ugly duckling on the street and then visiting your county’s register of deeds to see who owns it. The Multiple Listing Service (or MLS) is an organization that maintains a database of houses and other real estate for sale or rent all over the country.
Seized homes: Law enforcement agencies commonly seize property and then need to unload it. By focusing your energy in this area, you can corner the market on seized homes.
Teardowns: Homes that are beyond hope may still hold opportunities if the price and