Even if you get the deal of a lifetime, you need to know which renovations to make and which to skip. You also need to understand the applicable tax laws and know when to cut your losses and get out before your project becomes a money pit.
Dabbling in real estate is an expensive proposition. The first expense is the property acquisition cost. While low- and no-money-down financing claims abound, finding these deals from a legitimate vendor is easier said than done. Also, if you’re financing the acquisition, that means you’re paying interest. Although the interest on borrowed money is tax deductible, it is not a 100% deduction. Every dollar spent on interest adds to the amount you will need to earn on the sale or in rent just to break even.
Paying cash eliminates the interest, but even then, there are costs to holding a property, such as taxes and utilities. Renovation costs must also be factored in. If you plan to fix the house up and sell it for a profit, the sale price must exceed the combined cost of acquiring the property, holding it and renovating it. Even if you overcome these hurdles, don’t forget about capital gains taxes, which will chip away at your profit. If you plan on renting how long will it be till your investment has been recapped. Your money is less liquid than in the bank. You cannot simply evict your tenant when you need cash.
Renovating houses is time-consuming. It can take months to find and buy the right property. Once you own the house, you’ll need to invest time to fix it up.Even when renting usually to make a profit you will have to purchase a home in, less than perfect condition and fix it up. You’ll need to schedule inspections to make sure the property complies with applicable building codes. If it doesn’t, you need to spend more time and money to bring it up to par. Next, you’ll need to invest time to sell the property. We at the Johnson Team have experience with home flippers, and can take this burden away from you. Also selling it yourself will take you time and you will not have access to all the resources we do. Just like investing in real estate, it is not a hobby it is a profession.
Professional builders and professionals, such as real estate agents, carpenters and plumbers, often invest in houses as a sideline to their regular jobs. They have the knowledge, skills and experience to find, fix and sell a house. Some of them also have union jobs that provide unemployment checks all winter long while they work on their side projects.
The real money in real estate investing comes from sweat equity, regardless whether you are planning on renting or flipping. If you’re handy with a hammer, enjoy laying carpet, can hang drywall, roof a house and install a kitchen sink, you may have the skills. On the other hand, if you have to pay a professional to do all of this work, the odds of making a profit on your investment will be dramatically reduced.
Professionals take their time and wait for the right property. Novices rush out and hire the first contractor that makes a bid to address work they can’t do themselves. Professionals either do the work themselves or rely on a network of prearranged, reliable contractors.
Novices expect to rush through the process, slap on a coat of paint and earn a fortune. Professionals understand that buying and selling houses takes time and that the profit margins are sometimes slim. Professionals understand that buying and renting houses is not a get rich quick scheme.
Before you get involved in investing houses, do your research. Like any other business venture, flipping requires time, money, patience and skill, and it will definitely be more difficult than you imagined. We have experience ourselves in investing in residential real estate and have a close relationship with the St. Louis Real Estate Investors Association. We can help you get started.