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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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