00:00 Intro to New Series
01:02 Make Money When You Buy
03:56 Good Deals vs Money Pits
05:10 Buying for Later Use as an Investment
06:01 Exchanges, 203K Loans and Other Pro Tips
08:27 Let’s GO!
Hey there! Joshua Smith here. If you’re new to the channel, I do videos on real estate; buying, selling, investing and even some content directed specifically toward other real estate agents. This is not an “I know better than you channel”, I don’t assume to have any advice you can’t find elsewhere, but I try to present it in a way that is direct and easy to understand. Cut the fluff, get to the info. Well these next few videos I’ll be doing over the next few weeks will be geared toward some sensitive topics I’ve run across in this market in 2023, and may apply to you whenever you may find this video in the future. If you are looking for good tips and market info, this might be a great channel for you to subscribe to, and you can also hit that dinger bell to be notified when the next video comes out! Now let’s talk about “How to Make Money When Buying a Home”.
I heard this early on, when I wanted to get into investing in real estate, “most people think you make money when you sell, but the real money is made when you buy real estate.” How does that work? There are a few basic ingredients that can make the formula work, because like everything in real estate you just need to make sure the math is “math-ing”. Obviously a good deal is always a good buy. But what makes a “good deal”? A good investor is always going to ask “what’s the catch?” If a property is listed at a cheap price and it’s been on the market a while, more than likely there may be issues with that property. Whether these are really issues for you depends on your palette for repairs and renovations and your ultimate use for the property. But let’s assume you’re looking for a “fixer upper” you are willing to put the work into over time to bring up to your living standards to make this a solid stepping stone toward your forever home, or to actually become your forever home. If the house looks great, you can tell from seeing it (hopefully in person) that none of what’s needed is out of scope from what you are comfortable with, that’s a win! You may have found a great way to make some money on that purchase. Sweat equity is one way to make money upfront, but you should always make sure that you know the real cost of repairs that you will have to hire someone to fix.
That actually brings me to the next point, let’s talk about ARV. This is an acronym for “After Repair Value”. The ARV is how much the house should be worth after you make all your repairs and updates. Generally speaking, if you know what the house should be worth in your market based on comparable sales and hard data, you should be able to come up with a fair price that will help ensure you will gain equity on the purchase based on the known facts. Here’s some easy math to see this: The ARV of a house is $500,000. If you were to buy that house at that value, you would likely have to put 20% down, or $100,000, and say the house needs another $100,000 in repairs. That brings the house to a fair market value of $300,000. It’s not quite that clear cut all the time, but most investors are looking to spend no more than 70 or 80% of the ARV minus repairs, and the math doesn’t need to be more complicated than that. In this instance, if you can keep your repairs in budget, you’ll be buying that property with 20% equity, plus the cash you put in for your actual downpayment. Because remember, any cash you can put in will amount to equity in the home because it is not debt. Obviously we hope the market will help increase the value of the home over time as well, but making money on the purchase means you want to get it at today’s after repair value not making assumptions about future value – at least that aren’t reasonable assumptions to make.
Now circling back to what makes a good deal, and now that we know about ARV, you really do want to make sure you have contractors lined up in advance to looking for a house that needs repairs if you’re planning to go this route because they will be the ones, alongside your home inspector, that can help identify the scope of work involved. This is important because if you want to make money on your purchase, you have to make sure you’re not going to over-improve a house beyond it’s real market ARV. Unique homes are hard to appraise, and can be hard to sell for their worth. I have a whole list of contractors I work with that I call on all the time for advice and jobs that come up for myself and clients, and it’s the only way to make a deal work sometimes. But good deals aren’t just about the money, they’re also about timing. If it’s a clear deal, it’s not going to sit on the market forever. But someone with experience can get in quick and help ensure this investment isn’t going to cost more than it’s worth so you can get that offer in quick. Granted the desire to be in a historical home, or to be in a specific neighborhood or any number of other reasons to buy a house all play into the decision making process. But the math doesn’t lie, and though we never know the future, the current market will tell you a lot.
Making money on your purchase is also about how you intend to use the property. Will it be a primary residence or an income property? If it’s an income property, it’s a little more clear-cut. But even when you’re buying a primary residence if you consider how much value you know you can add right away, and down the line, that’s where you can begin to see value in your purchase. But even if you intend to live there, is it somewhere that you could see yourself renting later? Many investors will buy houses they can live in for two or three years, or longer with the plan to either sell at that point to upgrade their primary residence, or with the intent to turn this into a rental property whether short term or long term. Thinking ahead about that use is all part of how you want to look at your purchase. It speaks to another great rule of thumb I learned early on, you always wanna know your exit strategy before you invest.
The last thing I want to talk about is how you can use lending practices, the debt that you borrow, as a way to make money on your purchase. Full disclosure I am not a lender or a tax consultant, but I can speak to the advantages of utilizing these products. Many investors do already know about this, but if you are a homeowner, or want to be a homeowner, and would like to get into investing then, these are things you want to know, at the high notes. If you use a property for income purposes, whatever that may be, any income and non-primary residence can be used in a 1031 exchange. This is a tax exchange where you can defer the capital gains taxes you owe when you sell if you apply your profits to purchase another income property. Now there’s a lot that spills into that, so you definitely want to speak to a CPA or someone who deals directly in 1031 exchanges, but suffice it to say it’s a great way to defer that tax liability. There are other loans like the 203KFHA loan which gives you money for repairs before converting to a mortgage. This will let you get the repairs done first before you move in. Some banks provide in-house products for this too. So again, depending on your use for the property, there are options beyond just construction loans to renovate and restore prior to use and this can help offset some of those cash needs upfront and help you achieve that ARV you’re looking for. If you’ve been looking at this topic for a while, you may already know about these products, and you may also have heard using other peoples money is the golden ticket. I’m here to say that’s absolutely true, but you wanna make sure that there’s enough money in the ARV to compensate any investors you’re working with and sometimes it’s worth looking into a much longer play and even multiple properties as part of those arrangements to help ensure that overtime that bottom line will continue to grow.
Now I am working with investors now on projects just like I have described here and I’m always open to new ideas and suggestions, and my door is open for investors to work with, home buyers new and experienced whether they are looking for a rehab project or just looking to get the biggest bang for their buck. Leave your comments and let’s have a conversation about this topic and I hope that you will subscribe or turn those notifications on, so you can see the next couple videos in the series. We will cover selling tips for those that need to sell even if the market feels stale, even if you aren’t sure how to purchase your next home. We will cover how to purchase with high interest rates, overall talking about how to offset upfront costs so that you can continue to grow your portfolio or get into the home of your dreams. I’ll see you next time.