You Make Your Profit When You Buy
It is a common misconception that you make your money in high value asset transactions when you sell and get the cash or equivalents. This is not actually the case as you put the asset on your balance sheet when you buy, and the liabilities.
Did you know you have a balance sheet? Maybe not but the document is really just a representation of your assets. It is literally your assets that are real and the value is there whether you have recorded it or not. Keeping track of your assets is certainly a powerful way to track the value and will likely cause you to act in a way that produces more wealth.
It Is All In How You Price It
The secret behind making money on fixer-uppers is that you must begin by pricing the purchase based on the profit you are intending to make and then subtract all of the costs of getting there. Only then can you consider a purchase price.
This works because the profit is a discount based on the full market value in pristine condition. In real estate that discount is traditionally twenty percent or as high as twenty five percent in depressed or recessionary markets.
If you follow this formula you are on the right path to locking in wealth. What you do afterward will determine how your wealth grows. You could sit on it and let it ride the market, this works great if you rent out the property or use it as your own home.
Having financed the transaction and the fix up you could then refinance based on the equity you’ve built in. Remember that discount? You can now refinance with conventional loans that do not require private mortgage insurance, giving you the most efficient revenue situation. Your monthly cost will be based on loan repayments, property tax and insurance. Add in the cost of maintenance and property management and you’re done.
Profits Exchanges And The Certainty Of Taxes
Alternatively you might be determined to realize the value of the home as rapidly as possible. That’s a fancy way of saying you want to flip it for a quick profit. This can be a great way to earn a year’s income or more in one deal, depending on your market. However there are some tax implications that will put you on the hook for capital gains taxes.
You can limit your tax liability by putting your profits directly back into a new project as part of a 1031 exchange. This will limit your tax bill calculation to any funds you keep as cash, known as a boot. Also the time limits on 1031 exchanges are generous; you will have a reasonable amount of time to hunt for the next property in which you can invest profitably.
Do The Work And Realize The Value
So, yes there is a strong argument that fixer-uppers do lock in wealth. The trick is to find them in the first place. You may find that in a typical marketplace you will most likely have to look at many dozens of properties before you find the right one to rehabilitate. If that sounds like investigating one hundred properties or more, you are very likely to be correct, it is a very profitable investment opportunity because of the work you put in both before you find the right property and the work that you put directly into the property itself. Get with you local real estate agent who specializes in working with buyers get ready to do some work and happy hunting!