Tried and True Real Estate Investment
What is it with Real Estate Buyers today? Working with them day in and day out, I find most Buyers want to get everything they want in the first purchase. What ever happened to planning and moving up in Real Estate? I worked with an engineer about 20 years ago who worked out a plan to get his dream home and it worked. He got it with a very small mortgage he planned on paying off in five years. This is how he did it.
20 years ago interest rates were high and Real Estate sales were slow. So he had to make wise choices. It doesn’t take much to figure out what people are looking for and buying. As with most people, he purchased a starter home. In those days starter homes were the typical 1000 square foot home built in the 1950’s. They are all around the city, available in all locations. After he purchased it he of course updated the entire home. After a year he put it on the market and sold it for a profit. He covered the original purchase price plus the cost of improvements. He moved up to the next size home, over 1200 square feet. Doing the same updates, he put it on the market and sold it for another, larger profit. This gave him a good sized down payment for the next 1500 square foot home, which would have been good enough for most people. Instead, he followed his plan to update this home and sell it. This time he had enough profit to buy a home for cash and do away with the need for a mortgage. Instead he built his first home. Building a home opens the door to adding in a certain amount of sweat equity. Painting, staining and doing a number of other tasks to complete the home save thousands. Building a home usually shows an instant profit. Landscaping and installing a paved driveway also add value. Once the house was complete, he moved his family in and put it up for sale. This time the sale showed a huge profit. It was time for his final move. He paid cash for the best lot available and built the house of his dreams, large enough for his family and where they wanted to live.
The plan took him more than five years but when it was complete, he had the same mortgage he started out with. His mortgage was the same as a starter home, but now he was paying it on a much more expensive home, the one he really wanted. His plan was to pay that mortgage off in 5 years.
This is an easy plan to follow. All you need to do is begin by investing in a neighborhood you are comfortable with. The beauty of this plan is, it works in any market. In a Buyers market, which is usually a slower market, prices usually fall. But look at it in simple terms. Look for a starter home you can purchase in the $60,000 price range and resell in the $100,000 price range. Updates should be held to about $10,000 or less. What does that leave you with? A profit of about $20,000 to $25,000. Not a bad income for a year of work in your spare time. Now in a bad market, don’t forget, prices fall quicker in higher price ranges. Prices also recover slower in higher price ranges. In a good market you may have sold the $100,000 home for $110,000 or maybe $125,000. But look at the next move in a slow market. Your next purchase is going to be for a home in the $150,000, resale value range. In a down market the $150,000 price may drop to $120,000 to $135,000. In reality you are purchasing a larger, finished home with a large down payment. If you plan on moving up from there, of course you will look for another home requiring updates. So, you are not going to pay top price for the home. Homes that need updating may be $20,000 more than the price of the starter home, but what you are doing is using the profit as a down payment so your mortgage is the same, but now you have a larger home.
Of course the same applies in a Seller’s market with prices on the rise. You can sell for a higher price, but your next purchase is of course going to cost you more. A down market can work to your advantage better in a down market, but it still helps in an up market. When it comes time to build your dream home, lots will cost less in a down market and it is much easier to work with builder competing for business. Few people consider these details. I wander why.
Maybe the Internet blurred this vision. There are so may sites making promises they have no way of keeping. Those sites have no way of knowing your local market. Most of the advice they give is incomplete. They slant information for a reason. Those sites want you to buy into their system. Those sites may charge for on line courses. Most of their courses contain a small amount of common sense information loaded down with a ton of hype, like buying a home for $1000 and reselling for $100,000. Those sites fail to show you the work required to accomplish any goal. What is the cost of updating? How are you going to pay for updating? Those sites fail to share what happens behind the scene. Foreclosed homes are sold by highly motivated, highly trained asset companies. Asset companies compete for business from banks. They live or die on obtaining the highest market price for every sale. Asset companies employ people full time to assess local markets on a continual basis. Asset companies know local markets thousands of miles away better than most people living in those areas. The only way you can compete is to gather the same information they use. It is a simple process that requires a minimal amount of time when you invest in neighborhoods you are already familiar with.
Another motive those Internet sites selling dreams has concerns volume. Some of those sites invest a ton of money into Internet advertising to stay onto of search results. A company called Google showed the world how to build a fortune on nickles and dimes. A click here and there, they all add up. Now companies think nothing of paying dollars for leads. When those Internet companies collect your information they can sell and resell it to companies willing to pay big bucks for a lead. Like it or not, your contact information can be sold and resold. Looking for a home? There are dozens of companies willing to pay for your email address. Figure it out for yourself. If those Internet companies selling all that hype on Real Estate investment sell your information for a $1 to $5 how much are they making when they have a list of companies waiting to purchase your information? Now multiple that by thousands. Ever hear the saying, “information leads to success?” It takes on a whole new meaning in this information age.
Now which plan do you feel more comfortable with? The plan that works in any market, or a plan sold on hype? The market has changed. The Internet investment sites still play the same videos using prices from 5 years ago. They also fail to tell you the truth about the market. The cheapest homes need the most amount of work. The cheapest homes are also located in depressed areas loaded with foreclosed properties with little hope of recovery. When the work is complete, the house if still located in and area showing little or no recovery. This is why knowing the local market is the key to success. Getting the right reports is so important.