Real estate investors live and die
by their ability to add value. With no added value, there are no profits. This
is true with any business, but what makes real estate such a great business and
a great investment, is the number of ways you can add value and cash in on big
profits. Here are three ways you can add value to your properties.
Upgrades and Repairs: OK, this is
the obvious one and is the reason fix and flippers can make money. Some repairs
add a lot more value than it costs to do. The more creative you are with the
improvements, the more value you can add. For example, I have a client that
adds square footage to every house he buys. He really likes the inner city
properties because they are the hardest to add square footage. You either need
to finish an unfinished basement, or add a second story. There is not typically
enough land on the lot to add an addition by increasing the foot print of the
property. This client does a lot of basement finishes and "pop tops,"
but where he has made the most money is the basement that is only 5 or 6 feet
deep. He will go in and dig out the basement to a full 8 or 9 foot height and
then finish it. Something most investors would not think of, so he is able to
get the deal most other investors pass on. I have also seen some investors find
houses that don't really fit into a neighborhood and they make them fit. This
could be limited bedrooms or bathrooms or funky floor plans. All of that can be
changed. Obviously many cosmetic fixes like kitchens and bathrooms add a lot of
value too. There is a lot more to it than this, but the idea is to buy a
property at its true 'as is' value, (don't over pay), and then add value with
the repairs and upgrades.
Owner Finance: I love this one
because it is so easy to add value with very little to no work. You will need
to wait to cash in on your profits, but it is a way to increase a sell price
significantly. You can also use this strategy to defer tax gains over a few
years, instead of taking a big hit all in one year. When you have a property
for sale there are a limited number of buyers for the house, although right now
that pool of buyers seems pretty big. If you can increase the pool of buyers,
the demand for that one house increases, which forces the price to go up.
Someone that cannot qualify for an ordinary loan, limiting the supply of houses
to choose from for that buyer, will likely buy your property. That also
increases the price. You are adding value by giving them the chance to own a
home that they normally would not be able to own. For this value, you should be
compensated with a higher price and a decent interest rate on the profits,
while you wait for the buyer to refinance and pay you off in full.
Shared Units: This is one area of
real estate that I have not dabbled in, but it is extremely inviting. The idea
here is to sell your property to multiple buyers. You are seeing this a lot in
resort towns. It is always a vacation or second home. Have you ever been to a
time share presentation? They are pretty enticing aren't they? About 13 years
ago my ex wife and I were in Florida and got sucked into a time share sales pitch.
We decided to go because they offered us free tickets to Disney. We sat there
for about an hour and a half and then the hard sale came. They were very good
at selling the "idea" of the time share and had my ex wife sold. She
asked me to move forward with the deal, but I could not bring myself to do it.
I told her that I was not comfortable with an emotional purchase and that we
needed time to think it through. "Can I please have our Disney
tickets?" was my response. As we rode back to the hotel that afternoon, I
started thinking about the math. Each unit can be sold to 52 different people
because your purchase only gets you 1 week a year. Add that to the annual
maintenance fees and the numbers are staggering. I know people who have flipped
time shares successfully, because you can get them for free or near free on
Craigslist, but it is not an investment I was interested in. With that said, I
have considered doing a half or quarter share on a house in a ski town in
Colorado. In this scenario, you are sharing a house with 1 to 3 other people so
there is a ton more flexibility. You can use or rent out your weeks and you can
be guaranteed valuable high demand weeks every year. It is a way to get a
second home without the full expense. From the seller's point of view, it is a
way to get more for the house. ½ a share of a house is going to cost the buyer
more than ½ of the fair market value. I have seen business plans from investors
that would buy a house and quarter share it out. The idea was that after they improved
the property and sold ¾ of the house to 3 different buyers, they would own the
last ¼ free and clear. Obviously this strategy will work best in areas where
people want second homes. The downside is if there are any improvements or
major issues. I can see there being disagreements, so this is something you
would want, as a buyer, to work out with all the other owners in writing before
you buy.
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