“Without courage, all other virtues lose their meaning.” – Winston Churchill
Buying and selling fixer-uppers may be the best-known way of making money in real estate. The no-money-down real-estate gurus tend to focus on this area because the numbers can look very good, especially when you get into low-income housing.
It’s not as fast and easy as some say, but it can work. Today and tomorrow, we’ll talk about some of the ways I’ve done it. Today, I’ll tell you how to buy properties in “bad” neighborhoods. Tomorrow, I’ll tell you what to do once you’ve built up enough money to invest in better properties.
If you’re on a tight budget and want to start with inexpensive properties, you’ll be buying houses in the poorest part of town. That will make you (from some perspectives) the worst kind of capitalist pig — one that “gentrifies” ethnic neighborhoods.
Poor neighborhoods are generally ethnic neighborhoods, so, unless you are of the group you are “exploiting,” you’ll probably be categorized as some sort of local robber baron.
You’ll know how ridiculous such thinking is. But your neighbor — the woman who went to Vassar and makes a living promoting rich-lady wine-tasting tours in Tuscany — will secretly despise you. Oh, well.
Meanwhile, you will be busy:
* studying the neighborhood before you buy into it
* buying a cheap house, even by local standards
* fixing it up to sell it fast
* selling it to the first person who buys, regardless of race, creed, or color (That’s the part that will make people think you’re un-American.)
In order to make this a part-time business, you’ll have to develop a network of workers — reliable tradesmen who won’t overcharge you — to take care of all the fixing up. They should be the same folks you’d use for the rental properties we talked about yesterday. So if you eventually decide to go into both businesses — rental real estate and buying and selling fixer-uppers — you’ll be able to keep them pretty busy.
From what I’ve learned, there are two things you should do to make this type of investing profitable:
1. Don’t hunt and peck for houses. Target a specific area and plan to eventually buy up many if not most of the homes in that area. That way, you will get the benefit of having a neighborhood go up in value along with the individual units you are buying.
2. If you can, select a target area that has at least one border on the outside. By “the outside,” I mean a better neighborhood. Giving your potential buyers the feeling that they are buying into a section of a neighborhood that has a corridor to safety will increase — significantly — the value of every house in that section. It will also give you a wider market. (This is where you’ll be accused of gentrifying.)
What you look for in terms of structure in a buy-and-sell situation is very different from what you look for when you are buying rental property. When you are going to be a landlord, you want to buy a property that has no significant structural problems — roofing, plumbing, etc.
For a buy-and-sell home, you simply want to make sure everything is working now and will be working for another year or so. The more important consideration — at least from the profit angle — is how much “under market” can you buy it for.
What you’ll want to do is buy a $60,000 home in a neighborhood where most of the homes sell for $75,000, make it look 100% better for about $5,000, and then sell it for $73,000 in less than three months.
Sometimes, you’ll be able to do better than that. But you don’t want to hold onto a property for more than 90 days if you can possibly avoid it. Even if you make a smaller profit — say $5,000 to $10,000 — it’s better to get out of a slow-selling house and into another that will sell quickly.
In the buy-and-sell real-estate business, it’s all about moving quickly.
That also pertains to the fixing up you’ll be doing. Don’t take on anything that might require long-term renovation. Avoid bad roofs, serious electrical problems, and “issues” with sewage or flooding.
Spend your money on quick-and-easy stuff like painting, landscaping, and carpeting. If you can’t make the property look considerably more valuable with such “cosmetic” changes, you probably shouldn’t buy it.[Ed. Note. Mark Morgan Ford was the creator of Early To Rise. In 2011, Mark retired from ETR and now writes the Palm Beach Letter. His advice, in our opinion, continues to get better and better with every essay, particularly in the controversial ones we have shared today. We encourage you to read everything you can that has been written by Mark.]