Even a good home, if not clean and well maintained, can look disheveled and smell stale. Many homeowners place their homes on the market without proper staging (showcasing). They don’t mow the lawn, trim the bushes, touch up the paint, or even tidy up the house during showings. Unknowingly, they turn away prospective buyers and lower the profit potential of their property.
This kind of home gives you a perfect opportunity to swoop in and get a great deal. You buy the home for significantly less than market value, add elbow grease, and then resell the home for thousands of dollars more than you invested in it. In Chapter 21, I show you how to properly market and stage a home to get top dollar.
Buy low, renovate, and sell high
Some homes are undervalued because they’re missing an essential feature – a livable living room, a third bedroom, a deck, or a laundry room on the main floor. Other homes may have major eyesores, such as an outdated kitchen or bathroom. In either case, moderate to major renovations may improve the marketability of the house and its profit potential in two ways:
❯❯ Increase the home’s actual value. Wear and tear depreciate a home over time. Updates restore value, while added living space can boost the house into a higher price bracket.
❯❯ Expand the pool of interested house hunters. A two-bedroom house, for example, appeals only to people who are looking for a one- to two-bedroom house. Adding a third bedroom attracts anyone looking for a one- to three-bedroom house or a house with office space.
Adding to the real value of a home is a great way to maximize your profit, but don’t take on more than you can handle or build a mansion among bungalows. If you’re a weekend warrior or you have contractors on your team (see Chapter 4 for details), consider this strategy. If not, you may want to hold off until you get to know some local contractors.
Buy low, move in, renovate, and sell high
To maximize your profit, reduce expenses, and take a more hands-on role in rehabbing a home, consider moving into the home and renovating it at your own pace. If you and your family don’t mind living in the chronic chaos of a construction zone, this approach is appealing for several reasons:
❯❯ By living in the home you’re flipping, you avoid a second mortgage payment, tax bill, and utility costs.
❯❯ Because you’re living in the home, you get a better feel for the types of renovations that can make the house more attractive to future buyers.
❯❯ If you live in the home for at least two years, up to $250,000 of your 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. However, if you have children in school, I recommend that you avoid this approach, unless you intend to remain in the same school system after selling. Your children begin to make relationships, and big moves disrupt their lives.
Buy, hold, and 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, taxes, maintenance, utilities, and so on. Here’s a rundown of how this strategy works:
❯❯ You buy the house at less than market value, so 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 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 three ways: when you buy the house, when you hold the house, and when you sell the house. If you perform some value-add updates and renovations while you own the property, you may even boost your profit when you sell. Of course, with this strategy you won’t see the immediate influx of cash that accompanies a quick flip, but your net worth (the value of your assets minus what 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 beat up 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 next section for more about niche markets), don’t overlook newly constructed homes.
The best time to hit newly constructed homes is at the very beginning, when the builder first starts to sell units. After 60 months of construction, the cost to build may have risen by $50,000, 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.
❯❯ The purchase agreement should have a clause stating that the purchase is conditional upon 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.
❯❯ Watch out for clauses that give the builder a percentage of the profit when you resell the unit – a common practice in a strong market.
❯❯ Beware of inflated profit estimates. 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.
❯❯ If, after doing your research, you’re convinced of the benefits, then at least 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.
Focus on a niche market
When you’re looking