Acquiring Equity

With no added value, there are no profits. This is true with any business, but what makes property such a wonderful business and a great investment, is the number of ways that 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 likeĀ Bee Removal Melbourne FL add a great deal 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 since they’re the toughest to add square footage. You either have to finish an unfinished basement, or add a second story. There’s not typically enough land on the lot to add an addition by upping the foot print of their property. This client does lots of basement finishes and “pop tops,” but where he’s made the most money is the basement that is only 5 or 6 feet deep. Something most investors would not think of, so he is able to get the deal many other investors pass on. I have also seen some investors find homes that don’t actually fit into a neighborhood and they make them fit. This could be limited bedrooms or baths or funky floor plans. All of that can be changed. Clearly many cosmetic fixes like kitchens and bathrooms add a good deal of value too. There is a lot more to it than that, but the idea is to buy a property in its true ‘as is’ value, (don’t over pay), and then add value with the repairs and updates.

Owner Finance: I love this one because it is so simple to add value with very little to no work. You’ll have to wait to cash in on your own profits, but it’s a way to boost a sell price significantly. You may also use this strategy to defer tax gains over a few years, instead of taking a major hit all in one year. When you’ve got a property available are a limited number of buyers for the house, although right now that pool of buyers seems pretty large. If you are able to increase the pool of buyers, then the demand for that one house increases, which forces the price to go up. Someone that cannot be eligible for an ordinary loan, limiting the supply of homes to choose from for that purchaser, will probably purchase your property. That also increases the price. You’re adding value by providing them the chance to own a house that they normally wouldn’t be able to own. For this value, you should be compensated with a higher price and a decent interest rate on the profits, as you wait for the buyer to refinance and pay off you in full.

Shared Units: This is one area of real estate I have not dabbled in, but it’s very inviting. The idea here would be to sell your property to multiple buyers. You are seeing this a lot in resort cities. It’s always a vacation or second home. 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 since 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 promoting the “thought” of the time talk and had my ex spouse sold. She asked me to move forward with the deal, but I couldn’t bring myself to do it. I told her that I wasn’t comfortable with an emotional purchase and that we had time to think it through. “Can I please have our Disney tickets?” was my response. As we rode back to the hotel that day, I started considering the math. Each unit can be sold to 52 different people because your purchase just gets you 1 week a year. Add that to the yearly maintenance fees and the amounts are staggering. I know those who have flipped time shares successfully, since you can get them for free or near free on Craigslist, but it is not an investment I was considering. That said, I’ve considered doing a half or quarter share on a home in a ski town in Colorado. In this scenario, you’re sharing a home with 1 to 3 other individuals so there is a ton more flexibility. You can use or rent out your weeks and you can be ensured valuable high demand weeks every year. It’s a way to acquire a second home without the full expense. From the seller’s point of view, it is a way to get more for the house. 1/2 a share of a home is going to cost the buyer more than 1/2 of their fair market value. I have seen business plans from investors who would buy a house and quarter share it out. The idea was that after they improved the property and sold 3/4 of their house to 3 different buyers, they would own the last 1/4 free and clear. Obviously this strategy will work best in places where folks want second homes. The downside is if there are any improvements or significant difficulties. I can see there being disagreements, so this is something you would want, as a buyer, to work out with the rest of the owners in writing before you buy.

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