Why Invest in Fix-up Houses
There are many good reasons to invest in fix-up houses. They provide security in uncertain times, they tend to rise in value faster than most other investments, and you can do it part-time and at almost any age. Fix-up houses have the added advantage of reducing risk by purchasing houses for less money, allowing you to make lower monthly mortgage payments.
Security in Retirement
Are you like me and you never socked much away for retirement? You are not alone. The Employee Benefit Research Institute’s annual retirement confidence survey (2006) found that pre-retirees (1,201 Americans between the ages of 55 and 65) greatly underestimate how long they are likely to live and how much money they will need in retirement.
Experts say that we need to change our mindset from "assets" to "income" in retirement planning. It's not enough to know how much money we have in savings; we need to know how much income our savings can generate over time.
There is no better way to change our mindset and our portfolio from "assets" to "income" than by investing in real estate. If we invest wisely before we retire, and have a stable of reliable rental properties that generate steady monthly income, we can look forward to a retirement that provides security instead of uncertainty.
Security Today
When the shaky economy makes us as nervous as a cat in a room full of rocking chairs, we all want a safe haven for our money. Real estate is at the top of my list of sound investments. Below are five reasons why you can count on real estate to provide you with security today.
Cash flow
With a good rental property, after all the expenses have been covered, including mortgage, vacancy rate, repairs, and property management, you can still receive a good cash flow. This provides a reliable monthly income for as long as you want to keep the property. As the amount of rent that you charge goes up, your profits go up. Monthly rents were $450 per month in 1990 and $600 per month in 2000, according the the U.S. Census Bureau.
Demand for Housing
With our growing population, a gain of one American born every 14 seconds, we will have a population of 400 million by 2050 compared to today's population of 290 million (U.S. Census Bureau). With current immigration patterns and population growth, there will continue to be a demand for housing over the next 50 years.
Appreciation
According the U.S. Census Bureau, in 1970 the median value of a house was $65,300. In 2000 the median value was $119,000, an average increase of 3% per year, adjusted for inflation. From 1940 to 2000, the median increase was 5% per year, also adjusted for inflation.
To get a true picture of what we can expect to make in house appreciation we have to look at the long-term trends. These trends tell us that we can expect to make between 3% and 5% per year, not counting increases due to inflation. That may seem low, but when we consider that we only put a small percentage down, probably 5-10%, and we receive monthly rent checks that more than cover mortgage payments, it begins to make sense. The housing boom of 2003-2005 saw house values rise dramatically but the trends tell us that we cannot count on these kinds of profits in the long term. However, if history is any indication, we can rely on steady, long-term, profits.
Principal pay down
With each mortgage payment, you decrease the amount that you owe on a home loan) as you reduce your principal. When your property is rented out, someone else pays your loan for you. Also, equity goes up as property values appreciate over time. Tthe principal of a loan goes down over time at the same time that the house appreciates in value. The original mortgage (loan) is $150,000, which is also the original value of the house. As time goes by, the value of the house inceases to $300,000, due to appreciation. At the same time, the amount owned on the mortgage is reduced to $20,000, due to the mortgage being gradually paid down.
Tax savings
Uncle Sam gives real estate investors tax incentives. The federal government allows you to depreciate your investment (or reduce your taxes to account for physical deterioration of the house) on Schedule E of your annual tax form. In addition, you deduct expenses related to your investment from your gross income on IRS Form 1040, and reduce the amount of income that you pay taxes on.
The Advantage of Real Estate Over Stocks
You are more likely to succeed in real estate than in stocks because you have more control over your real estate investment. As William Nickerson, author of How I Turned $1,000 into Three Million in Real Estate in My Spare Time, said, “by comparison (to stocks) you can retain personal control at all stages in the selection, operation and improvement of your income property.” When investing in stocks, you relinquish control of your money to a stock manager. Your only decisions are when to buy and sell.
In addition, with real estate you have the potential to realize a much higher return on investment. To purchase stocks you must pay the full price of the stock, and of course, you receive the full benefit when the stock goes up. If you purchase $100,000 of stocks and the value goes up to $150,000, you make $50,000. In real estate, when you take out a loan, you can receive the benefits of the entire value of the real estate by only investing 10%, 5% and sometimes as little as 0%, as a down payment. If you purchase a $100,000 house with $5,000 down, when the value of the house rises to $150,000 you still receive the full $50,000 increase (Table 2-5).
Table 2.5 Returns on Investment
Real Estate vs. Stocks (adjusted for inflation)
Type of $ Invested Value Value in 10 years Return on Investment Investment
Real Estate $5,000 $100,000 $150,000 $50,000
Stocks $100,000 $100,000 $150,000 $50,000
Buying Fix-up Houses Reduce Risk
A fix-up house reduces risk two ways:
1) You pay less money up front and monthly. When you purchase a fix-up house, because it is a house in dire need of repair, you pay a lower price than you would for a house ready for occupancy. By paying a lower price for a house, you pay lower monthly mortgage payments at a time when you will need the extra money to make repairs.
2) You increase your opportunity for profit because you have the built-in profit that can be used as investment money for the next house that you purchase. You have a built-in financial advantage, because you will increase the value of the house by $20,000-30,000, or more, when you complete the repairs. The value of the house rises to the value of the other houses in the neighborhood.
More Time with Family
Parents want security and safety, and all of the advantages that they themselves didn't have, for their children. Money from real estate can provide that safety cushion. The extra income from real estate allows parents to spend more time with their children and less time working for a company that may not appreciate your efforts. To paraphrase the “golfer’s creed,” the worst day with your family is better than the best day at the office. When you reach retirement and look back, what really counts is the time spent with family.
You Can Do It Part-time
You don't need to leave a secure job in order to get involved in fix-ups. My fix-up business is my hobby. I do all the work on weekends and evenings. If you have the right perspective on your new hobby, you will look forward to weekends and evenings doing fix-up work, as something fun and exciting.
It's better not to quit your regular job because loan companies like to see regular income, and your job will provide money for fixing up your properties. It’s also nice to have your salary as a secure income source for times when unexpected expenses occur, or when you are between tenants.
You Can Start Later (or Earlier) in Life
The U.S. Census Bureau reports that 75 percent of multifamily investors are over the age of 45. Over half of these own less than 5 units and they earned roughly 31 percent of their income from their investment properties.
The logic behind these statistics is that most real estate investors come to invest later in life because they are concerned about their retirement and are at their highest potential earning power. Forty-eight percent inherited a home.
While older people tend to build up more financial resources over time, investing in fix-ups is equally suitable for younger people just entering the job market. A young investor could pick up an inexpensive fix-up rental property around a university. In a few years, while he or she is still relatively young, they could make enough money from their real estate properties to have a steady flow of rent money coming in, enough to help pay for a college education.
Women Are Leading the Way
The field of fix-up properties is as open to women as it is to men. As real estate renovator Suzanne Brangham, in Housewise, stated, “having been a wife, a mother, and then a single parent during my fifteen years in this business, I can attest to the fact that this career (of renovating houses) accommodates all life-styles and schedules.”
Mary Weir, in her book House Recycling, documented how she made $1 million by renovating houses. She learned the necessary repair skills, and she became an expert at repairing mansions. By the end of 15 years she had purchased and repaired 30 houses. Ms. Weir says, “all you need is willingness to learn from books, from professionals, and from trial and error.”
Make $106/day Profit with Just Two Rental Properties
A relatively small investment in only 2 fix-up properties can generate a good daily profit. Adding together three benefints of owning a rental property illustrates that you can make an additional $106 per day, or $32,000 per year, each day that you hold two rental properties and principal residence (Table 2.6). The components included rental income, principal pay down and increases in equity (not including tax deductions or depreciation.) Value of each house is estimated at $200,000 for a total of $600,000. See Chapter 7 for the formula that I use for calculating total revenue from rental properties. Granted, you don’t see the principal pay down and the increases in equity in a paycheck, yet they still generate wealth behind the scenes that becomes available when you refinance or sell the property.
Table 2.6
Calculating Total Daily Profit
Rent from 2 properties per month (after mortgage payments) $400/month
Value Increase on $600,000 at 5%/yr ($30,000/yr) divided by 12 $2500/month
Mortgage pay down $300/month
TOTAL $3200/mo. = $106/day
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