1. Get Ready – Now that you’ve decided to start investing in homes for a profit, it’s time to properly set your goals and expectations in your mind. Calculate how much cash you have available for this investment. Make sure you have enough money to cover a twenty percent down payment, the home remodel, and enough cash on hand to cover the monthly mortgage payment until the property is available. I know it sounds overwhelming, but I’ll show you how to cut down on your startup cash and remodeling funds. It always makes sense to write your plan. It doesn’t have to be anything fancy, it just has to make sense to you. You cannot know where you are going without a map to navigate.

2. Identify a good property to invest in: Now that you have an idea of ​​its address, it is time to consider the type of property that would make a good investment. Find out if you want to buy a single-family home that needs work or a multi-family home where a condo conversion might be your intention. For our purposes here, we will discuss the single family home move. If you do not have access to the Multiple Listing Service (MLS) in your area, find a reputable real estate agent who can provide you access to the MLS. It is wise to have a buyers agent because it does not cost you money. The buyer’s agent is compensated by the broker’s agency. Once you have access to the MLS, you can start looking for properties. I like to search by zip codes in areas that I know have desirable neighborhoods. In a down market like the one we find ourselves in now, there are many dilapidated houses in great neighborhoods. Those are the houses that will always sell first. You should focus on bank-owned, short-sale, and foreclosed homes on the market. Keep in mind that no matter how much the seller asks for the house, what matters is whether the project makes sense. I usually calculate the price I will pay for a house after calculating the amount of work that needs to be done and how much I can sell it for. Remember, the market tells you what a home will sell for, not a price tag.

3. Property Inspection and Analysis – Before you can make an informed offer, you need to know two things. You must first know how much it will cost to bring the home to its highest and best condition. You should appeal to the type of buyer who is most likely to buy the home. You should have a reputable contractor meet you at the house so that they can give you an idea of ​​the costs involved. Now add 20% just to account for unexpected costs. Once you know your cost, you should check with your real estate agent to determine what similar homes have sold for and see which homes you will compete with. Now that you have a good idea of ​​the future selling price and the cost of construction, you can now use basic math to add the cost to the purchase price and then subtract that answer from the estimated future sale price to determine if there is a margin of profit enough for this move to make sense to you. Tip: Don’t forget to add the sales commission to your cost if you plan to hire a real estate agent.

4. If the numbers work, get funding! – Once you know there are enough profit after your acquisition cost, estimate the remodel and cost to sell. Now you know how much you should pay for the house. Before bidding, you must obtain your financing. This is my area of ​​expertise as I have been a mortgage broker for several years. There have been many changes in the mortgage industry since mid-2006. Money is a little harder to come by, but it is still available with a down payment and a decent credit history. The guidelines are always changing, but right now, in late 2008, a minimum 20% down payment is required to purchase investment property and the borrower must show income and assets to qualify. If after the 20% down payment, remodeling money and cash to cover the monthly payments, you don’t have much money left, you should consider a partner for the deal. You may not be a fan of long-term partnerships, but when you’re changing ownership, you’d be looking for a 4-6 month partnership, not a lifetime. If that works, you can always buy more properties to sell in the future. It also helps to divide risk and tasks. Just make sure your expectations are set correctly. If you’re going the partner route, I suggest opening a joint bank and financing it with 6 months of mortgage payments, including taxes and insurance. If you have any more questions about financing, I’ll be happy to answer them. I will provide my office contact information at the end of this article.

5. Remodeling / Rehab Phase – It’s time to repair this house and get it back on the market as quickly as possible. Now you need to get your contractors in to begin the construction phase. Keep in mind that cheap labor will almost always be more expensive. Make sure contractors get the proper permits. The last thing you want is a forced work stoppage because the required permit was not withdrawn. Also, if these workers do not know the code or do not compile it, it will usually cost twice as much to correct a code problem. By now, you should have a detailed list of everything that needs to be done. Breakdown by major systems such as heating, cooling, plumbing, electrical, and any other systems that need repair or service. Then go room by room and make a list of what needs to be done in each room. Joint compound and a fresh coat of paint are very helpful. Just be sure to use modern, neutral colors that aren’t offensive to anyone. Be sure to inspect the exterior of the home for repairs and touch-ups. The patio must be clean and properly landscaped. Be sure to check in with contractors daily to make sure everything is on track – don’t just assume everything is on schedule. Finally, take advantage of the use of credit from Lowes and Home Depot to avoid payments and interest for six to twelve months. You should be able to buy most materials with that credit. Just be sure to pay off the entire balance when the interest-free period ends or you’ll be hit with all the increased interest.

6. Sell your home quickly – Now that your home is complete and ready to go on the market. You should already have an idea of ​​how much this property will include in the list, but you need to check the value once more. The best way to do this is to have an appraiser or real estate agent do a comparable market analysis. If you don’t know an appraiser, call your mortgage broker and ask them to use their appraiser to help determine a range for you. I do this for my mortgage clients as a free value-added service, it’s just good business practice. You may want to sell your home yourself and that’s fine, but you need to have time to show it off and also be able to list the property on your local multiple listing service. If you are trying to avoid paying a full real estate commission, a local real estate agent will usually make a “entry only” listing for a nominal fee. If you don’t have the time or don’t want to deal with the hassle of listing the home yourself, hire a real estate agent to list your home. You should have already added the sales commission rate to your figures beforehand. When calculating value, be sure to look not only at similar homes that have sold, but also at your competition. Your home should be a good deal when the average buyer compares it to others in the same price range. Lastly, if you don’t get enough screenings after a week or so the house price may be too high, don’t be afraid to lower the price. Sometimes a small profit is better than no profit. That is why you should buy the property you want to invest as low as possible and estimate the remodel as accurately as possible.

7. Plan for Your Profits – If you correctly priced your newly remodeled home, you will remember and will soon close. If you have planned correctly, you should make some profit. It would be wise to have a solid plan regarding your earnings. Here are some options; You can simply take the profits, as well as your initial investment, and place them in your bank. In that case, you have just created a taxable event or, in other words, a long-term or short-term capital gain, depending on how long you’ve owned the property. That option is better if the profit gain was minimal. If you made a significant profit and were planning to trade another property, you can defer your taxes through a 1031 exchange. Basically, a 1031 exchange is a tax code that allows you to defer capital gains tax to a later date, reinvesting your earnings on another investment property within a certain period of time. There are rules that must be followed for the trade to be valid, but considering the benefit, it could be worth it. The advantages of doing a 1031 exchange include having more money available now and more purchasing power. It means not paying taxes while building your real estate investment business. You can invest your earnings, just like investing a home. Here’s an idea, why not switch houses until you have enough down payment funds to switch to a 30-unit apartment building. Then you can turn your money into cash flow. You can defer paying taxes until after you sell the last property and take the money. It is always wise to speak to an accountant when making tax decisions, so always consult a professional CPA when it comes to tax law, that’s money well spent.

I leave you with one last thought; Use professionals from start to finish. Licensed professionals may seem like they cost more, but they will save you money if they get the job done on time and correctly.

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