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One way to make money in real estate is to buy a property that no
one else wants and turn it into a property that's in high demand.
Although the plan is simple, finding the right property in the right
location and then buying it at the right price takes time, patience
and expertise.
Finding a property can be a real challenge, particularly if
you're looking in a market that's low on inventory. When the listing
inventory is low, and buyer demand is high, you can find yourself
competing even for a run-down fixer-upper.
The combination of a low asking price and perceived potential is
a big draw. You need to guard against paying too much in this
situation.
Years ago, a developer bought a property that was sold to settle
the estate of the deceased owner. The house was in a wonderful
location and had a spectacular view, but it needed a lot of work.
The developer ended up in competition with another buyer and paid
way over the asking price.
He put the property back on the market a year later after he'd
completed the renovations. During that time, the market changed from
a seller's to a buyer's market. The developer had trouble selling
the property. After calculating the money invested and the cost of
carrying the property, the developer actually lost money.
Market conditions have a big effect on how much money you'll make
on a fixer project. The ideal time to buy is at the end of a down
cycle in the market, when there are few buyers and a lot of
listings. This is when you might actually find a good deal. If the
market turns upward while you're renovating the property, you'll
realize appreciation in addition to the added value you create
through renovations.
Financing a fixer-upper can be a challenge. If the deferred
maintenance is obvious, a lender might not be willing to lend unless
some of the problems are corrected before the loan is funded.
House Hunting Tip: Major fixers are best left to buyers
who have experience in contracting and renovation. However, cosmetic
fixers can offer great opportunities for buyers who are interested
in increasing their net worth through renovation. A cosmetic fixer
is a listing that lacks appeal, but that's structurally sound.
In order to maximize the return on your investment, make sure
that the improvements you make to the property are in sync with
current buyer preferences in your area. Your real estate agent may
be able to provide you with this information. You may want to
consult with a local designer to find out which finishes and colors
are popular.
Before diving into a rehab project, become an expert on your
local real estate market. You need to know local values in order to
keep from over-improving for the neighborhood.
Here's a fix-up strategy that works well for some buyers. Buy a
cosmetic fixer and occupy it. Buyers who occupy the property get a
better interest rate on their mortgage than they would if they
didn't occupy the property. This will save you money.
Fix up the property and sell it if the market is good when you
finish the project. If it's not, enjoy living in the property and
sell when the market is right. The current tax law allows homeowners
$250,000 of tax -free gain when they sell ($500,000 for married
couples who file jointly).
The Closing: Tax-wise, you can repeat this strategy once
every two years if you can find good projects and can stand living
in a construction zone.
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