First in a series about investing in real estate
By most measures, the past eight years have been a disaster for most of the real estate industry.
However, for investors who had the prescience to buy real estate at bargain-basement prices and the financial ability to hold it, the time may soon arrive when those high-risk investments will pay off.
“Home sales are on a sustained uptrend, mortgage interest rates are hovering near record lows and unsold inventory is at the lowest level in 12 years,” said Lawrence Yun, chief economist at the National Association of Realtors.
Before making any investment, you need to answer two questions: Am I willing to be a “hands-on” investor? And how much risk am I willing to accept? Assuming you are willing to take a hands-on approach and can tolerate a fair amount of risk, buying, renovating and “flipping” may be just right for you.
A good candidate for a flip is generally a home that requires repairs and/or renovations to make it desirable for someone to buy and live in. Sometimes the necessary fixes are minor and cosmetic in nature, such as landscaping, painting and carpeting. Other times a property needs major work, such as replacing a roof, updating the kitchen and bathrooms or even reconfiguring the home.
The goal here is to buy the home at a discount below the fair market value, make the repairs and/or renovations, and then sell the home at the fair market value. But how much of a discount?
Experienced renovators often say that you make your money when you buy, not when you sell. To arrive at an offer price, you can use the same method they use.
First, determine the home’s after-repair value: the market price that comparable homes in mint condition, in the vicinity, have sold for within the past three months. A real estate agent with access to a multiple listing service record of sold homes can be a valuable resource.
Second, determine the expected repair costs as precisely as possible. To do that, you should assemble a team of honest, experienced real estate professionals, including an architect, home inspector, appraiser, general contractor and, if necessary, a carpenter, plumber, electrician, HVAC contractor, roofer, environmental or mold inspector and landscaper. They should inspect the home with you.
The results of their inspections can be used to determine three categories of repairs. The first is the must-make fixes needed to meet minimum building codes and the requirements of financing agencies such as the Department of Housing and Urban Development, Federal Housing Administration and Department of Veterans Affairs. The second is repairs to correct functional or aesthetic obsolescence. This is where the pink-tile bathrooms, avocado-green appliances and beige laminate counter tops get replaced with modern, natural-stone walk-in showers, stainless-steel appliances and granite counters. The third is a wish list of upgrades. Radiant-heated bathroom floors, wine cellars and high-end fixtures and finishes can shine, if your budget and the market can support them.
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