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Do you worry about getting through the recession with your fixer upper house business intact?
Check out my ezinearticles.com piece entitled Proactive Responses to Recession – 7 Creative Ways to Make Extra Money With Real Estate.
Looking for motivation to get started in the Fix em Up, Rent em Out business?
Just Follow Your Dreams.
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Is now a bad time to retire? Probably not if you have been investing in fixer upper rental properties, but that’s the question asked by John, an attendee of at an investment seminar. In a recent newspaper article by Chuck Jaffe entitled Retiring when the market is down is costly if stocks provide nest egg addresses that question.
To see Chuck Jaffe’s opinion and my “unbiased” take on it, check out my new ezinearticles.com piece entitled Is This A Bad Time To Retire? Not If You Have Rental Properties.
Along the same lines, we must consider which offers more security, retiring with a pension or retiring with real estate.
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Buying fixer-upper houses, repairing them, and renting them out is a safe way to generate short-term income and long-term wealth. But, how can you be sure that a house is worth what you are offering to pay for it? Based on experience, we can eyeball the property and probably be able to make a pretty accurate estimate of its worth 90% of the time.
However, that’s not good enough. We need more information than our educated eyeball can provide. In order to:
1.) avoid any surprise defects after its too late, and
2.) negotiate a lower selling price for the house,
we hire a professional inspector to do a physical and structural inspection.
For the last post related to due diligence see Due Diligence Property Inspection, Part 8 – pest control and property damage.
Most purchase agreements require the seller to deliver the property in good physical condition with all basic systems in good shape, unless the seller discloses otherwise. Generally, the inspection process reveals deficiencies that need to be corrected, whether they were disclosed or not.
So with inspection reports in hand, you are armed to arrange for the seller to correct the noted items at his/her expense. The seller is trapped in a corner. He reads the report and sees the photos showing the inescapable evidence that repairs are needed. He either makes the repairs or you walk.
Inspect the inspectors before you hire one.
Most investors hire a property inspector based on the advice of a real estate agent, which is not necessarily a bad way to go. But, you will be spending a tidy sum to hire an inspector, so its best to interview a few before deciding. You may see a big differences in experience, qualifications, and ethical standards. I would never hire an inspector who would not allow me to accompany him during the inspection.
Tagging along with the inspector presents a great opportunity to learn about your property, and will arm you with knowledge that will be invaluable throughout your entire ownership of the house. You’re the one paying for the inspection. How can the inspector say no?
If you want a true professional, hire a full-time inspector who perform 100 inspections a year and who carries “errors and omissions” insurance. This coverage tells you that the person is working full time in the field and is participating in ongoing continuing education.
To locate certified inspectors and find out more about the inspection process see the American Society of Home Inspectors web page.
Ask for a sample of one of the inspector’s recent inspection reports prepared for a comparable property. And, require your finalists to provide you contact information for 3 people who have used their service in the last 6 months.
Price should be a secondary concern because like other professional services, they often pay for themselves. An internet estimate of inspection costs indicates that prices range from $215 to $750, with an average price of $260 (in the southwest where I live).
Earlier articles in this series:
Due Diligence Part 7, Physical and Structural Inspection
Due Diligence Part 6, Tricks Sellers Use to Avoid Inspections
Due Diligence and Fixer Upper Properties Part 5 – the “as-is” sale
Due Diligence, Part 4 — Disclosure Requirements
Due Diligence, Part 3 — Inspecting the Property
Conducting Due Diligence, Part 2 — Reviewing books and records
Conducting Formal Due Diligence
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The review of Chapter 2 of my book “Rent em Out, Fix em Up” is now up on REI monoloco blog. The article is entitled And the Big Question, WHY?
The review covers shifting from “assets” to “income” and 5 unassailable reasons why you should invest in fixer-uppers.
And, as though that weren’t enough reason to charge over to the site, Mark is offering the chance to win a FREE copy of the book just for answering a question that he posits after the article!!
Other good blogs to check out:
It’s sad to see Connie at Conniebrz.com leave the blogoshpere, but you can read her parting words entitled And Thanks! For All the Fish …. Good luck Connie!
But We’re Paying Full Price addresses the issue of buyers creating never-ending repair lists for sellers, at flipthyhouse.com.
Find out what is The Best, Cheapest Investment When Selling at fsbojane.com
Rentalsrus.com explains why now is a good time to invest in the article A Question From Jack.
Want to retire early? Read Early Retirement Requires Financial and Lifestyle Planning at getrichslowly.org.
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In a never-ending effort to provide incomparable service to the blog community, my book Fix ’em Up, Rent ’em Out: How to Start Your Own House Fix Up & Rental Business in Your Spare Time can now be purchased for $9.00 for immediate download via PayPal.
To order, select the “buy now” link in the side panel below the Amazon.com link.
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Moolanomy.com has a review of my book “Fix ’em Up, Rent ’em Out,” and in the same article is an insightful analysis of the pros and cons of real estate investing.
The article is entitled Meandering into Real Estate.
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I was interviewed about my fixer upper house business for an article that appeared in the Arizona Daily Star today, entitled Buying Real Estate. I attach it for your reading enjoyment.
Several investors are interviewed about their experiences in the Tucson real estate market. One disclaimer that I will offer is that I actually said “Prices are higher (not lower) so there’s less competition when buying.”
Now I know how my fellow celebs like Arnold and Bradjalina feel when they are misquoted. It’s a heavy weight to bear.
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Serial home sellers buy houses, live in them for at least 2 years, and then sell them and pay no federal capital gains tax. The key to making a serial home seller business work is to find houses that you can add value to. How do they do this?
They buy houses below market value that need repair
We now know, if we didn’t know it before, that prices don’t continue to rise every year at 5%. In fact, it appears that house prices may continue to drop for several years into the future.
So, that means that we have to add value to the house. We must find houses in need of repair and bring them back to their former glory, to force the value of the house to go up.
I know, you’re saying, “But Terry, your answer to everything it to buy a fix-up house. You have been promoting that forever. That’s the name of your blog, and your book, and probably your dog.”
My response is, how did you find out the name of my dog?
Actually, my response is that this is not merely an improbable coincidence, but it actually is the way to make the system work. You must find the right house in need of repair to buy before you can expect to make any money when you sell.
Key Advantages of Fixer-upper Houses
The three great advantages of buying fix-up houses are:
1.) You buy them for much less than you would pay for
a normal house, so you spend less of your investment money to get in;
2.) Because the price is less, monthly mortgage payments are also lower than if you had bought a traditional house;
3.) After the repairs are completed, the house automatically increases in value, and is valued the same as other houses in the neighborhood. This is a faster and more certain way to add value, rather than having to wait for housing prices to appreciate.
Learn to Make Repairs
Another key to making the serial home buyer/seller approach work is to make your own house repairs, as far a possible, instead of paying someone else to do it.
Never miss an opportunity to do your own repair work. Think of it as part of your educational process. You lose two ways when you hire someone to do your work. First, you lose the chance of a free education, and second you lose the money that you would have saved by doing it yourself. It may take you four hours to change an electrical receptacle or fix a toilet that won’t flush, something a professional could do in minutes. Don’t be concerned, in the long run you have learned a skill to be used for the rest of your life.
To learn more about making repairs, read “So You Want to Learn the Zen of Making House Repairs” that I posted at Amazon.com.
Where you find these properties in need of repair? Tune in to the next blog installment.
Serial Home Buyer/Seller Tax Exemption, Part 5 – sources of fix-up houses
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How it works
Utilization of this tax exemption is one of the safest investment strategy for the conservative investor who wants to take few risks, not to mention for fixer upper house investors. Under this strategy, the investors can quality for the least expensive loan, the owner-occupied loan. There is no need to worry about tenants destroying your rental property or not paying the rent. You completely control the investment by living in the property yourself. When you sell, you have the opportunity to bring in up to $500,000 tax-free money every two years.
Here is an example to show how the exclusion works, illustrated in Table 1. You and your wife file jointly and you continuously buy and sell homes over the years, each time purchasing a more expensive home as a replacement. Let’s say that you bought a house for $300,00. For the last 5 years you have owned the home and it is now worth $600,000, with $300,000 worth of accumulated gain. If you were to sell your home now for $600,000, without the tax exemption you would be subject to a capital gains tax on $300,000. The amount of taxes saved with the tax exemption would be $84,000. Table 1 also illustrates other amounts of gains.
Table 1
Home Selling under the Taxpayer Relief Act Exemption
(assuming a 28% tax bracket)
Home/ purchase price/sales price/ capital gain/ tax saved
#1/ $150,000/ $200,000/ $50,000/ $14,000
#2/ $200,000/ $300,000/ $100,000/ $28,000
#3/ $300,000/ $600,000/ $300,000/ $84,000
Ownership and Use Tests
To qualify for the tax exclusion, you must pass both the ownership and use tests. This simply means that during a 5-year period, ending of the date of sale, you have:
1.) Been owner of the house for 2 years (ownership test)
2.) Lived in the home for w years and it was your main residence (use test)
Maximum Amount of Exclusion
A total amount of $250,000 can be excluded if all of the following are true:
1. You meet the ownership test
2. You meet the use test
3. You did not exclude the gain from another home sale during the 2-year period
A total amount of $500,000 can be excluded if all of the following are true:
1. You are married and filed a joint return for the year
2. Either you or your spouse meets the ownership test
3. Both you and your spouse meet the use test
4. Neither you nor your spouse excluded gain from the sale of another home during the 2-year period ending of the date of the sale.
Can You Get a Partial Exemption?
Unforeseen circumstances may allow you to claim a reduced exclusion if either one of the following is true:
1. You did not meet ownership and use tests due to :
– a change in location of employment
– health problems
– unforeseen circumstances (see below).
2. Your exclusion would have been disallowed because you sold more than one home during a 2-year period, except that you sold the home due to :
-a change in location of employment
-health problems
-unforeseen circumstances
Unforeseen circumstances can include:
1. Death
2. Divorce or separation
3. Not eligible for unemployment compensation
4. Multiple births from the same pregnancy
5. Damage to the home from natural disaster, war, or terrorism.
6. Condemnation, seizure, etc.
In these cases, the amount of capital gains tax the could be excluded would be based on the number of months that the home owner lived in the home during a 24-month period. If a home owner couple lived in their home for 12 months, they could exempt 50% of the $500,000 exclusion, or $250,000.
What are the advantages and disadvantages of becoming a serial home buyer/seller using the tax exemption?
The next installment we will examine that question.
Serial Home Seller Tax Exemption, Part 3
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One of the most useful advantages for fixer upper house investors is also one of the most under-utilized. My wife and I bought a house we are presently repairing that we plan to sell utilizing the federal tax exemption. This generous gift from the all-wise lawmakers in Washington DC is part of the 1997 Taxpayer Relief Act.
The 1997 Taxpayer Relief Act was a great boost for average people who wanted to sell their home and buy a new one. It was also a great boost for investors. Couples are allowed to exclude up to $500,000 of the capital gain on the sale of their primary residence. Single individuals can exclude up to $250,000. In other words, the sale of the house is never reported on your federal IRS forms if the capital gain is less than the $500,000 and $250,000 limits. This exclusion is based on compliance with two requirements:
1. The home must have been the primary residence for both spouses during two of the last five years. The two years do not have to be consecutive but if you rent out the primary residence for more than three years you would be required to occupy it again for two years.
2. The exclusion is available only once every two years.
Capital gains above $250,000 for singles and $500,000 for couples are taxed at the applicable rate. What if you sell your house before meeting the two year requirement? If you qualify under one of the unforeseen events listed in the IRS publication, such as a job change, illness or an unusual hardship, you can still qualify for a prorated exclusion. Check Publication 523 for a complete list of unforeseen circumstances, at:
http://www.irs.gov/pub/irs-pdf/p523.pdf
There are many advantages to buying, repairing houses and selling after two years, while utilizing the tax exemption. My wife and I maintain rental properties that provides regular monthly income, but we are also buying and selling with the tax exemption, to generate cash for future investments, and just to have more cash on hand. I will cover more details of the tax exemption in up-coming posts, such as how it works, advantages to investors of using the exemption, what properties to buy, and other topics.
Tax Exemption for Serial Home Buyers/Sellers, Part 2
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