Monthly Archives: September 2016
As a real estate investor, author and podcaster, I’m often asked if it is “too late” to buy real estate. After all, prices have climbed dramatically over the past several years, and many homeowners and investors are worried that they’ve missed their chance.
My answer is always the same: No, it’s not too late.
However, today, unlike the past, when almost every property was a good deal for buyers, you have to hunt for (and buy) only the best. And one specific way to do that is to purchase a property and increase the value significantly. That way, if home values do drop, you’ll avoid being “underwater.”
But how do you add value on a piece of real estate without spending tens of thousands of dollars? While there are potentially hundreds of techniques, here are my favorite ten methods for helping the value of your properties to increase.
1. Don’t buy stupidly.
While this first item technically does not require you to do anything special to the property, it is nevertheless the most important step in building quick value. If I buy a home for $20,000 less than it’s worth, I’ve forced an appreciation of $20,000. While I don’t need to go into detail explaining exact methods, just know that your profit is made when you buy, not when you sell. For more on finding great deals, read 4 Simple Tips for Finding Incredible Real Estate Deals.
2. Try out the ‘Ikea bedroom miracle.’
One of my favorite ways to quickly improve a property is to simply turn a “bonus room” into a bedroom. The best transformation involves turning a two-bedroom home into a three-bedroom one. Oftentimes. this can be accomplished for the price of an Ikea wardrobe, but can add tens of thousands of dollars to the value of the home.
3. Increase your property’s curb appeal.
It may be obvious but it is still shocking: the number of investors who spend thousands remodeling a home but neglect to do any more to the outside than a quick paint job. While fresh paint is a great way to add value, there are many more steps you can take as well to spruce up a home’s curb appeal. A nicely manicured lawn with well-defined landscaping can help achieve higher rent or a quicker sale — both of which can make the value climb.
4. Raise the rent.
If we’re talking about rentals — especially multifamily properties — raising the rent can be the key to increasing a property’s value. If your rents are low, a small increase can add significant value to your property. This is especially true for multifamily properties. Raising rent just $25 per month per unit on a four-plex can add $1,200 per year in extra income and (depending on your area’s cap rate), up to $20,000 in forced value overnight.
5. Rent out those nooks and crannies.
You may already be at the top of your rental price capacity, but that doesn’t mean you are getting all the income you can out of your properties. Are there any storage sheds, broom closets, garages or simply vacant land that you can rent out to increase your income? Mini-storage is a multimillion dollar industry, and you probably have more space to rent out than you realize. As happens when you raise the rent, additional income often means more value.
6. Increase your fees.
In addition to capitalizing on all the physical ways you can increase the income in your investments, how about the fees? Are you charging for background checks, late-rent fees, missed maintenance appointments or parking violations? How about your laundry facilities or paid parking? Are you getting all the fees you deserve?
7. Lower your expenses.
You are probably paying too much for too many things. As an investor, one of the “hats” you wear is auditor for your business. Perhaps you can negotiate a better rate for garbage pick-up. Perhaps you can transfer the water/sewer/garbage expense to your tenant. Perhaps spending a few hundred dollars getting all those dripping faucets can cut down your annual water bill by thousands of dollars. Whatever your strategy is, if you decrease expenses, you will be able to increase the value of a property.
8. Add a bathroom.
In the old days, one bathroom was standard in most homes. If you are remodeling a home and find this is the case, take note of where the plumbing is located and what extra space there is around, above, or below that plumbing. Oftentimes, you can add a small half bath for several thousand dollars and add tens of thousands in value in the process.
9. Tear down those walls.
As long as a wall is not “load bearing” (and sometimes even if it is), you can take down a wall (or half of one) in a matter of hours and create a much more “open concept” feel. This can help increase the desirability of a home and thus improve the value as well.
10. Paint the neighborhood.
One of the biggest detriments to your property’s value is not your property at all — it’s your neighbor’s home. A quick paint job, landscaping or simply a run to the dump can often be the best money you’ll spend, trying to increase the value on your own property. Obviously some tact is needed and many people are opposed to getting “charity,” but it’s hard to turn down a free paint job or yard clean-up.
I think that we all find ourselves getting stuck finding money, I mean we all think we have a good deal, we all think that we have the knowledge, but when it comes to the money we find ourselves short. Our friends and family are telling us no, the banks tell you no, and most of all you say no to yourself. Without a target, you won’t get anyplace. You look at your first deal based on the money you have, and many of you give up on the real estate game because you don’t have any money. When you get started you don’t have any money, right?
Let me tell you there is no such thing as no money down. No bank will lend you money with no money down, and no seller will carry a note without you putting some money down even if it’s a promise to do money in the future. There is no such thing as no money down because the money is going to come from somewhere. It’s money down if you’re going to have to do something if you have to exchange something with the person giving you something. If they’re going to give it to you for nothing, then trust me, you don’t want it. So the question becomes, how would you raise money if you don’t have any money?
The first thing I say, and I say this over and over, is that the deal is what matters, not how much money you have. I say it doesn’t take money to make money, it takes guts and courage. The thing you should be chasing is the deal, not your budget. Most people make decisions on how much money they need based on their job and on how much money they spend, but this is backward. You should make the decision on how much money you want regardless of how much money you spend. This is why people never get ahead. The deal is senior to the amount of money you have.
The secret is called OPM — other people’s money. It’s going be somebody’s money. Somebody’s money is going down because there is no such thing as no money down. How do you get the money from other people? Finances are about playing offense, not defense. Don’t chase your budget. Instead of chasing a $200,000 deal, chase a $2.5 million dollar deal. Do not buy less than 16 units, because without 16 units you cannot have a manager. If you can’t have a manager you’re either not going to have your attention on the property or your property will become your full-time job.
Go to investors, people that have $100,000 each, $20,000 each and give them a good deal. You’re going to have to offer a good deal because people are taking a chance on you. Who would you go to first — mom, dad, uncle, brother, sister? You can go look for investors in your local area, maybe a real estate investment club because those are the people who maybe don’t have enough time but want to put $50,000, $100,000, $200,000 into it. There’s a lot of people out there right now that have money sitting in the bank.
You’ve got friends and relatives giving their money to Wall street right now, and they don’t know anybody in that place. They are putting it in mutual funds, IRAs, and 401ks. You need to convince them to go in with you. Their money has been reduced to little digits and it’s backed by nothing. Money basically represents an idea backed by confidence. You need to raise money.
I want to look at bigger deals, and if I want to look at bigger deals, sooner or later everybody runs out of money. I don’t care how rich somebody is, sooner or later you run out of money. You’re buying a business so get creative. There’s nothing set in stone. If you want to get into the game, you either go out and tell your mom, your dad, your uncle, and find others to go in on a deal, or you find a guy like me and ride his deal. Either way, you will have to raise money.
I suggest you don’t invest until you can learn how to make enough money on your own to save at least $100,000. If you can earn enough to save that, it shows that you are ready to begin multiplying your money. Until then, rather than worrying about real estate, concentrate on increasing your own income. Get skills so that you can make enough to save rather than living paycheck to paycheck.
I’m giving lifetime access to Cardone University right now, and it’s a lot cheaper than any real estate. It will teach you how to start increasing your income so that one day you will have money to put down on a piece of property. If you want to do real estate with no money down, you will have to sell others on you. Cardone University is the #1 sales training platform in the world and will help you in any industry, in any town, and in any country.
Remember that old high school girlfriend — the one with the annoying laugh? You put up with her because she was nice enough, but one day you met that new girl, and she was everything you ever wanted. Best of all, your new romantic target showed definite signs of interest and wanted to date. But you had a problem: You still had the old girlfriend.
While this drama doesn’t take place in the life of every high school student, something similar does happen to most adults. But, rather than girlfriends . . . it’s houses.
You buy a house and it’s fine, but then you need to move on to another property. Maybe that’s by choice or work is forcing you to relocate. Either way, you have the same problem as that high school Romeo: What to do with the old house?
While trying to date two girls at once may prove difficult, owning two homes can actually work and be profitable if you rent out the previous home. By keeping the house, you can begin building serious wealth through cash flow and equity. But how do you know if that’s the right move?
Sell the house and move on? Or rent it out? As with most real estate questions, these are not universal “right or wrong” questions, but once you understand the options, you can make the best choice for your situation.
Here are five factors to consider when deciding whether to sell or rent out your house.
1. Will this property generate cash flow?
The first thing to look at when deciding whether to rent or sell your house is the math. I know, math was likely not your favorite subject in school, but luckily all you need is a fifth-grade mind to understand real estate investment math.
First, ask: Will this property produce positive cash flow?
In other words, when this property is rented out, and you deduct all of the associated expenses (mortgage, taxes, insurance, utilities, management, vacancy, repairs, HOAs, etc.), will the property produce a monthly profit or a loss? If it’s a loss, consider selling.
For more on analyzing properties, read my Ultimate Guide to Analyzing Rental Properties.
2. What about the return on investment?
Next, consider how much you would profit if you sold the property today, assuming you’d lose around 10 percent to agent fees, closing costs and other sales expenses. If you would make little or nothing, it may be advantageous to hold on to the property and wait for the market to improve over time. This is especially true if the property will provide positive cash flow in the meantime.
If you would make a profit by selling, consider your return on investment. For example, if you could make $100,000 in profit by selling your house and achieve only $1,000 per year in cash flow, that’s a 1 percent return on investment. Better to take that $100,000 profit and invest it in something else that could produce a higher return.
3. Consider the taxes.
The U.S. government does a lot of things I don’t agree with, but one thing it does that I absolutely love is the potential exclusion from paying capital gains tax that’s allowed on the sale of your primary residence.
Normally, if you sell real estate and make a profit, you have to pay capital gains tax on the sale, up to 20 percent, depending on your tax bracket. However, the IRS allows homeowners (sorry, investors!) to exclude the sale of up to $250,000 (or $500,000 if married filing jointly) of a primary residence if you lived in the home for at least two of the last five years.
Let’s look at another example where this might come in handy. Consider the fictional case of Bob and Marge, who bought their home in 1990 for $150,000. Today, they can sell the property for $500,000, clearing $300,000 after the sales expenses.
If they keep the home as a rental for, let’s say, five years and then sell, they’ll potentially owe $60,000 in taxes. But if they sell now, they can potentially keep that $300,000 in profit without paying any capital gains tax.
Of course, by keeping the property, there is always the likelihood that it will appreciate in value to a level higher than what the tax would have been, but there are no guarantees when it comes to real estate values.
(And I’m not a CPA, so to learn more about this possible capital gains tax exclusion, consult a tax advisor or read the IRS’ rules on the topic.)
4. Does the future look bright?
Another important factor to consider when deciding whether to rent or sell your house requires gazining into your your crystal ball for the future. What do the next five, 10, 20 years look like for your home’s location? Are things improving? Will your neighborhood decline in value? If the future looks dark, consider selling now to avoid problems later on.
Of course, we don’t have crystal balls, but trying to gauge where the market’s going is not impossible. Take a look at the growth of your city — is it moving away from you or toward you? Are businesses moving into your area? Are homes being fixed up or left to rot? You can’t know with 100 percent certainty, but by analyzing the current trends in your market, you can make a more informed decision on whether to hold on or sell now.
5. Can you handle tenants?
Finally, ask yourself: Are you willing to be a landlord? Because, honestly, many people are simply not cut out for the life. While some tenants are a dream to manage, others require significant time and patience to deal with. Last week, I had to deal with the eviction of a “garbage hoarder.” It wasn’t pretty.
Luckily, landlording is a skill that can be learned and improved upon. All new landlords make mistakes, but if you are the kind of person who is willing to learn, you’ll do fine.
Also, just because you own rental properties does not mean you have to be the person dealing with the tenants. Professional property management companies exist in nearly every city, and if you can find a great manager, he or she can cut the stress of rental property ownership down to a minimum (for a fee, of course!).
So, once again, should you rent or sell your house?
Unlike what happens with high school girlfriends, real estate allows you to keep both the old and the new. But deciding whether to rent or sell is a choice only you can make after weighing all the options.
If you are trying to make that decision right now, take a look at the five factors outlined above and make the choice that works best for you, your family and your financial future.