Now that the house is officially mine I guess it’s time to share with you guys the financial details and how I plan on making this investment work. Before I begin I want to take a moment and recognize why real estate makes for a poor investment. Obviously I think the house will make a good investment or I would have never liquidated my stock portfolio and made an offer on a house that need a lot of work. However, it would be foolish of me not to consider the reasons that could reduce the likelihood of making money off my purchase. This is a useful exercise and one I try to utilize in all aspects of my life. If you believe that real estate makes for a poor investment and I believe that it makes for a good one then it should be just a matter of determing who is right; right? Taking this approach would cause both parties to miss out on the potential of increasing their understanding of the subject, real estate investing. So instead of looking at it as a debate that needs to be won, I look at it as a chance to increase my understanding by letting another persons point-of-view merge with my own and by doing so come away with a greater understanding of both the potential for gain and loss that real estate (or any investment) offers.
Real estate is not even close to being as liquid as stock investing. Before if I wanted to sell off some shares for whatever reason I could wake up in the morning and if Mr. Market was offering a fair price I would click sell and BOOM!, instant cash. Owning a house is a little different. I first have to complete the rehab before I can get my initial capital back and any of the additional expense of rehabbing the property. Then I have to find a buyer and this can be significantly more challenging than just clicking a “sell” button in my brokerage account. If someone were in a position where they would need a large sum of cash quickly it is doubtful real estate would be the best investment choice. I will agree with the opponents of real estate investing that illiquidity is the least attractive characteristic of real estate.
Owning a home can certainly be expensive and I say this with a bit of experience as I’ve owned a couple of houses before. However, housing expenses are like expenses in general; they are only as high as you choose to let them be. If you were to read this article over at Kiplinger’s you would think that owning a home is outrageous, at least I did! Controlling expenses is foremost in my mind going forward, however it is a little different when your residence ends up being an investment as well. Property taxes and insurance are costs that I will recoup when I sell the home; when your housing is just a place to live you end up eating these costs and hoping the property appreciates enough when you sell to break even or hopefully make a little more.
These are just a couple of the reasons that could potentially make real estate an undesirable investment. Each persons will enter into real estate with unique circumstances that will make the transaction good or bad on its own merit. Always remember that when claims are made for or against a topic there is usually a set of assumptions underpinning the claims. If your circumstances fall outside of those assumptions then the claims themselves are likely not applicable. I’ve chosen an uncommon path to real estate investing by purchasing a foreclosure and living in it until it is rehabbed. This fact alone make a huge difference in determining whether it will be profitable or not. Never forget to question assumptions…
Little house you are about to undergo a complete transformation!
This house is a little under 900 sf. It is not a large home by any measure. It currently has 2 bedrooms and one bath. There was a third bedroom but that was torn out for some reason. Part of my rehab will be adding the bedroom back to the floor plan and hopefully making it easier to sell when the time comes. The asking price was $40,000.00. The final cost for me including closing cost, which I requested the seller pay (3% is what they would cover), was $36,061.55.
I initially estimated it would take $20,000.00 to complete the rehab. My contractor friend who came and inspected the property suggested I plan on $30,000. Ouch!! That is not what I wanted to hear contractor friend! He told me he didn’t think it would actually be that much, but would rather me go in estimating higher and being ok with it than to underestimate and end up screwing myself (my words not his). Comparables in this area and the same size as this property have recently sold for $103,000 at the high end and $89,000 at the low end. I’m thinking this house should sell for $ 90,000 when completed and that is at the low end. I think it is better to estimate expenses high and resale low than it is to hope for low expenses and an unrealistic resale value.
Selling price: $90,000.00
Profit: $23,938.45 or 36.2% Return
There you have it, my plans going forward with this project. These are projections and could easily be off one way or another. I think by estimating conservatively on both the expense and resale estimates that I have given myself a margin of safety. I’m going to work hard in both reducing the cost of repairs and on getting a higher selling price. Hopefully it won’t turn into this: