I’ve personally invested in real estate. I love real estate as a tool to invest long term and/or build a cash flow business. What I hate about real estate as an investment is when first time investors read a book or see an informercial where you can get rich quick flipping houses using other people’s money and blindly take a huge risk. Yes, some get lucky but most learn the hard way that the risk is too high.
Here is the point of this blog and feel free to read further for explanation: It’s very risky to use other people’s money to flip properties. In great/low inventory/seller’s market areas the return is too low because you can’t get good deals when you purchase. In riskier/high inventory/buyer’s market areas the deal will be there when you buy but then after 3-6 months of rehab the buyers have dried up and you have to take a loss or break even to get it sold.
I get many phone calls from first time investors. They call and ask me to send them good properties that are great for investment. For the inexperienced investor that wants to flip a house in the suburbs of Philly it is difficult for me to tell them the truth: You’ll be lucky to make a 10-15% return on your money on a flip. That is assuming you are using your own cash for down payment and fix up costs. If you are not using your own money then that return goes down more.
So, how do you get the best return on a flip? You make your money when you buy.
- Cash is king. Investors who get the highest returns on flipping property in this area pay with cash and buy homes that are so bad that the average homeowner won’t touch them. Banks trying to unload foreclosures and distressed properties know how difficult and time consuming the bank loan process is. Banks will sell a foreclosure at a lower price to a cash buyer over a higher priced offer that is contingent on a loan. (I can set you up on a search where foreclosures and bank owned properties are emailed directly to you as soon as they hit the market)
- Buy at auction or on the court auctions. Getting deals at auctions with all cash purchases can be really good deals. Unfortunately, real estate agents do not have access to these so it is a process that needs to be researched on your own.
- Buy when everyone else is not. Winter is the best time to buy as an investor. There are much less buyers out looking due to holidays and cold weather.
- Find contractors that are fast and good prices. Velocity of money is important here. Get the rehab work done fast and for a low cost. If you have time do some of the work yourself then do it!
- Sell in the spring market. That’s when you have the most buyers looking for homes.
- Stay up on the latest trends and technology. Know what the buyers need and want in that price range when you fix up houses.
- Be sure not to overimprove for the neighborhood. Don’t take a split level home in a neighborhood with all split level homes and put $100,000 into it trying to sell it for $500,000. It won’t happen. You’ve overimproved it.
- Buy the worst property on the street. These have the most chance of making money because the nicer homes will pull it’s value up higher once the rehab is complete.
- The house needs to be in a neighborhood and not on a busy street or anything nearby that will pull the value down like a sewer treatment plant. Also, the better rated the school district the better chance you have of selling it for a higher price and selling it fast.
Is there another way to make money investing in real estate? Yes! Cash flow properties but again you need cash.
- Buy fixer uppers and rent them out. Buy a foreclosure with at least a 10% down payment but 20% is better to avoid PMI. Cash is better to increase cash flow.
- When you buy a fixer upper to rent just clean it up, paint, carpet and make sure everything is in working condition. Don’t fix it up too much until you are ready to sell it.
- If you buy and hold then assuming you buy in a great area you will also have appreciation. So when you go to sell it or if you decide to hold it long term and refinance out some cash to buy more investments then that equity will be there.
- You don’t want to be a landlord? Then hire a management company to manage it and watch the rent checks come in. Lower cash flow but more time to research more investment properties to buy.
- Depreciation. You can depreciate your rental properties for more tax savings and that provides an increase in cash flow.
- Research the rental rates for the investment as well as the resale value when you analyze investment properties. You want to make sure you are making the most cash flow per month as well when you need to sell that it can sell quickly and hopefully for a profit.
- Did you know for a married couple that $500,000 of capital gains is tax free ($250,000 if not married). Here’s IRS info on it: https://www.irs.gov/taxtopics/tc701.html If you buy a foreclosure, fix it up, live in it for at least 2 years of the past 5 when you go to sell it then the money you make is tax free. Do that! Fix it up enough to live in it then slowly fix it up over 2 years if you are low on cash. Do that every 2 years until you hit the maximum. Climb that property ladder.
Those are some quick tips and thoughts on investing. Feel free to reach out to me if you have any questions. Laura Laws firstname.lastname@example.org or 484-985-5222.