Investing In Real Estate, Lesson 4
Yesterday, we talked about buying and selling fixer-uppers in bad neighborhoods. But you don’t HAVE TO start at the bottom. If you have more money to invest, you can do all of the above in a better neighborhood. In fact, if you can, I’d advise it.
Buying Properties in Not-so-Bad Neighborhoods
The higher the level of fixer-upper you can buy, the more money you’re going to make. Neighborhoods tend to be priced within certain price ranges. But those ranges are determined by percentages, not absolute numbers.
Generally speaking, the range is about 30%. That means that in a neighborhood of homes with a mean selling price of $90,000, the vast majority of individual homes would be priced between, say, $75,000 and $105,000. A neighborhood of homes with a mean selling price of $60,000 would have a range between $50,000 and $70,000. And one with a mean selling price of $400,000 would have a range between $340,000 and $460,000.
Rule of thumb: The more expensive the fixer-upper you do, the more money you’ll make from it. So start where you need to and graduate to more expensive properties as you go.
My brother-in-law’s experience illustrates this. Since he got into this business two years ago, he’s made a decent living with his “bad”-neighborhood investments. He turns over an average of three or four a year at a $20,000 profit for each. Recently, however, he fixed up a $170,000 house that he moved into. When he was offered $275,00 for it a year later, he happily vacated.
Buying Properties in Really Good Neighborhoods
I know a lot of builders. And many of them play the musical-home game. It goes like this: They buy a relatively inexpensive home in a pricey neighborhood (say, a $550,000 home in a $700,000 neighborhood). They move in and use their resources to fix it up over a period of time — usually six months to a year. They can’t really afford to live in such an expensive home, but everything is a write-off. Plus, they have plans.
Soon after everything is finished, along comes a buyer — and they are “forced” to sell their home for a $150,000 profit. They invest that money in their next home — a $750,000 home in a $950,000 neighborhood.
One of these guys just moved into my neighborhood. He has put — as near as I can tell — about $1.7 million into a house that could easily fetch $2.7 million. He hasn’t told his neighbors that it’s up for sale, but I know two brokers who are showing it privately. This is a guy who was living in a $65,000 townhouse 10 years ago.