*** This article was first published in the Georgia Real Estate Investors Association Handbook in 2001. Some specific details (i.e. prices and tax information) are out of date, and should be viewed with that in mind. If you are interested in learning more about the concepts covered in this article, please visit www.gareia.com, or contact us at info@gareia.com or at 770-451-8800. ***
(Continued from November’s blog post “From the Archives: A Guide to Real Estate Investing in Georgia (Part 1))
Purchase Strategies
The primary goal of this program is to control an asset worth a large amount of money while using little or none of your own money. You hope that, eventually, that asset will go up in value, and in the meantime, you are paying it off using other people’s money again (rental income). That being said, you find that time is on your side in almost every real estate situation. Eventually, the property will be worth more than it is today. The one exception to that theory is a property in a bad location. Almost every problem that arises in a real estate investment can be improved – but a bad location is out of your hands. Experienced investors recommend that you NEVER buy a property in a bad location.
Creative financing revolves around the creation and use of “paper,” which is really nothing more than a formal IOU or a “Note.” You can “create” thousands of dollars by simply agreeing to pay at a later time, either in installments or in a lump sum, or a combination of the two. The most common note is a conventional thirty year mortgage, where you agree to pay back money in monthly installments of principal plus interest over 360 months. There is no magical requirement that a note have any interest or even any payments, for that matter. Successful investors believe in the GOLDEN RULE, when it comes to real estate negotiations. If you will do unto others as you would have them do unto you, you will find that you are more successful over the long-haul. In addition, people will want to do business with you.
It is critical to discover the underlying reason that the seller needs to sell. If you can meet those needs creatively, then the opportunity exists for you to have a WIN/WIN transaction. If that opportunity does not exist, or if the seller is not willing to give you the chance to help, then it may be time to move on to the next house for sale. Remember, the seller has only one house to sell – you have literally tens of thousands to buy.
The major areas of flexibility the seller can control are price, repayment terms, interest rate, amount of cash needed at closing, and date of closing.
It is important to try to limit the amount of hard cash going into every transaction, because once you have run out of money, you must forego any future opportunities, no matter how good.
The ideal scenario is one in which the lender will allow you to assume the mortgage, and the owner will sell you the house and carry back a second mortgage for their equity. You must determine how much their equity is worth to you.
If you plan only to buy a house, fix it up, then sell it for a profit, and you have the cash to get started, then you are well advised to use your cash. When you sell, you will be able to get all your cash out, plus your profit, and you can go on to your next deal.
Renovation Techniques for Optimal Profit
Your goal in any real estate investment is to own the least expensive home in the most expensive neighborhood you can afford. If that is the case, then the principle of progression says that the more expensive homes will appreciate at a relatively faster rate than your house, and they will pull your house along with them, giving you optimal appreciation.
Likewise, don’t put so much money in the house that you can never recoup your investment. Be very careful to estimate your improvements accurately in advance, and don’t fall prey to the desire to add on and add on. You can run up a rehab bill dramatically if you don’t watch every penny.
You also need to decide before you start your renovation whether you plan to hold for rental or you want to sell quickly for profit. Because most renters think of their residency as relatively short term, they are willing to accept less in terms of improvements than a buyer will. There is no need to make a rental property fabulous – it simply needs to be reasonably attractive and competitive with the tenants’ alternatives.
On the other hand, if you plan to renovate and resell, you’ll have to add some real pizazz. Visit all the homes that are currently for sale in the area, and see what your competition is like. There is no need for you to vastly exceed what the competition is offering, and you’ll never get the money back if you do. Costs add up quickly, and buyers today expect things to be in good condition. So make sure that you first budget for fully repairing essential items before you spend all of your improvement money on the pizazz. Don’t forget that all buyers will likely hire a professional inspector to go over your offering with a fine-toothed comb. That means you already should have done so!
Resale Strategies for Investors
There are several considerations that must be taken into account if you decide to sell your property quickly.
If you hold the property for less than one year, the profit you make will be considered a short term capital gain, and you will have to pay a large portion of your profit as taxes. Current short term capital gains tax rates are identical to earned income rates, so you will likely be in the 28% bracket or higher.
If, on the other hand, you can hold the property for more than 18 months, the profit qualifies for long term capital gains treatment. Currently, ling term capital gains (LTCGs) are taxed at a maximum 20% rate.
There are only three reasons why any property won’t sell. Most problems in selling are a variation on one (or more) of the following:
- It’s not ready to be shown.
- It’s not being marketed properly.
- It is priced too high.
One of the best resources for persons interested in owning and managing rental and investment properties is the Georgia Real Estate Investors Association, Inc. We are a non-profit educational organization that serves our members with programs on various real estate topics. For more information about our meetings, call 770-451-8800.
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This article first appeared in the Georgia Real Estate Investors Association Handbook in 2001. Some specific details (i.e. prices and tax information) are out of date, and should be viewed with that in mind. If you are interested in learning more about the concepts covered in this article, please visit www.gareia.com, or contact us at info@gareia.com or at 770-451-8800.
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Published by Georgia Real Estate Investors Association
Copyright 1998 by First American Management Corporation, All Rights Reserved