“FIX AND FLIPS”
Most of our “Fix and Flip” Investor Clients engage in this activity in order to generate cash flow, thus near-term wealth. The key to success in this type of investing is found in locating and acquiring the subject property—One makes their money on the “buy”.
In a stable market, look for either a property with a distressed owner or a property with significantly deferred maintenance. One needs to cover both the cost of the fix and the net profit in the purchase price. Typically, look for about a 10% net pre-tax income. For example, the average resale price of a home in metropolitan Phoenix is $265,000. The “fix and flip” model would look something like the following:
|Sales Costs (Escrow, Title, Realtor Commissions, etc.)||$15,000|
|Pre-Tax Net Profit||$25,000|
Please note that residential real estate investors typically look to make as much in pre-tax net profit as they invest in the fix. Of course, the above example illustrates a perfect model. The key to this particular example actually taking place falls directly on the shoulders of the Selling Agent’s ability to find the right property, in the right location, and successfully negotiate the acquisition in the face of multiple investor competitors.
Make sure to add enough value to the fix in order to push the resale price up in order to make your target pre-tax profit. To facilitate this, it is vitally important that you drive and shop other active listings in the area; to determine how much ‘push’ the neighborhood can absorb prior to throwing in money and over pushing what the neighborhood will bear.
In other scenarios, an investor might be wise to scale down the fix in order to quickly flip the property for an acceptable net profit. Regardless of your ‘fix and flip’ approach, it is of utmost importance that you work with a seasoned Realtor who can quite literally walk into a prospective property and work out the financial model in his/her head within 10 minutes. Your agent usually will be within 98% accuracy if they know what they are doing.
If the Investor Client were to replicate a 10% pre-tax net profit every 90-day cycle, throughout the year, the actual annual rate of return on one’s money is much higher than 10%. The original $200,000 investment we illustrated before now has been turned at least four times in one year with a gross return of nearly $100,000, which translate into a 50% return on one’s initial investment.
“BUY AND HOLD”
Sometimes the wild ride of the fix and flip market may offer just a little bit more excitement than some Investor Clients want out of life. Many investors these days are looking for a more stable long-term investment strategy. The “Buy and Hold” approach has always been a popular alternative to the “Fix and Flip” rodeo. Investment properties offer some unique long-term strategies for the Investor Client:
Once the Selling Agent has identified a suitable property where you can achieve both short-term positive cash flow as well as long-term equity growth, the Investor Client may close the escrow and sign a Property Management Agreement. You’ll continue to have ongoing input and final say into a myriad of management details that, at least partly, will determine the long-term success of your investment.
Many times real estate investment properties are purchased with borrowed funds. If a property is purchased with considerably more debt than equity, it is considered to be a “highly leveraged” investment. Assuming that a property appreciates in value over a long-term period, you’ll be earning a return on the total “leveraged” investment, not just on your equity. Assume, for example, that you purchase a $100,000 property using $10,000 of your own money and $90,000 in borrowed funds. Given a 5% annual appreciation, in ten years your $10,000 investment will have earned a return of more than $60,000 in property value appreciation. That’s the power of leveraging. In the case of Valley of the Sun Real Estate, most of our clients own their investment properties outright, and have zero debt to service. We are not advocating leveraging debt to make money. It may be the only a viable option for investors who may not be in a position to pay for all their properties in cash. ·
Typically, tenants of rental property pay rent on a monthly basis. That means that if you’ve purchased the right property in the right location, you’ll have some passive cash flow income flowing to you every month. You’ll likely be left with a relatively small chunk of the total rental cash flow, of course, after deducting expenses such as mortgage payments, property management fees, repairs and maintenance, etc. But having real, in-your-pocket cash return from your investment each and every month in addition to long-term equity growth is a major perk of owning an investment property. ·
Not you. Though you’ll be getting the benefits of the mortgage used to purchase your rental property, your tenants will be amortizing the mortgage for you. The longer you own the property, the greater the amount of the mortgage your tenants will have paid down for you. Every year, your tenants will be building your wealth as they reduce the mortgaged principal and increase your equity value. ·
An enormous benefit of owning a rental property is the payoff you’ll receive in tax deductions. The amount of tax write-offs that you might gain depends upon your personal circumstances, but you can reasonably expect some very significant tax savings. Your mortgage interest can be written off, along with the costs of insurance, legal and professional services, maintenance, travel, and many other business-related expenses.