How to get better real estate deals begins with explaining an “average” deal.
While every real estate deal is unique, average deals appear every time you Google “average rate of return” or “average return on investment”.
Do you want to make just “average” real estate deals?
Or, do you want to do GREAT real estate deals?
How to Get Better Real Estate Deals Tips from Successful Investors
It’s amazing how many successful real estate investors talk and write about how they did it. Big egos bragging about their success? Maybe, some want to give back by helping novices achieve success too? Whatever their reasons be grateful that some share their secrets.
So, other than “buy low and sell high” strategies everyone knows about, what are some of the ways to achieve better deals?
Save on Taxes
Real estate investors take big hits on the capital gains tax when selling a property.
Think about these suggestions to save on taxes:
Capital Gain Taxes
Avoid the expensive short-term capital gains tax. How? By simply waiting a year and a day before selling. At that time, it becomes a long term capital gain subject to lower tax rates.
Take a look at these two charts comparing short term and long-term capital gains tax for singles and married couples in 2018. Expect an indexing increase of 2% in 2019.
Make sure all the sales proceeds go to a Qualified Intermediary to hold in trust until you purchase the replacement properties.
A few IRS rules you need to learn about like the 45 day and 180-day rules. In addition, the total value of your replacement properties must equal or be greater than the sales price of the one(s) you sell. Same goes for the equity and debt on the original property.
Keep exchanging for more properties whenever you sell to keep deferring the taxes.
Learn all about 1031 Exchanges from a recent blog post HERE.
Selling on a Lease Option defers capital gains taxes.
That’s because, in the beginning, you collect rental income until the lessee makes the option to buy your property. Since every rental payment reduces the purchase price expect a lower long-term capital gain tax when the sale occurs.
Seller financing with a nice down payment spreads the payments over many years putting yourself into a lower income tax bracket.
Some recommend selling part of your promissory note to recoup the rest of your capital for better liquidity.
Pursuing Your Property’s Best and Highest Use
Think of getting the biggest “bang for your buck”.
You don’t need to do costly renovations or additions to your properties to increase their market value justifying raising rents for greater profits.
In fact, read one of our recent blog posts here how for $500 or less on rental property improvements you substantially increase value HERE.
Get creative with financing to improve profitability.
Suggestions include longer-term loans like using the equity in your property with a HELOC (Home Equity Line of Credit). Then, use the loan money to lend as private money to other investors. Use the latter as an “arbitrage” allowing you to earn more money on the spread.
Or, try accelerating paying down your debt from your investment returns.
Understanding the Market
If you don’t understand the stock market you will lose when investing in stocks. The same applies to real estate investments.
How much is a typical house in a certain neighborhood worth per square foot? How much rent can you receive for that home?
Renovating properties is all about appealing to potential buyers.
Curb appeal as real estate agents describes how appealing a house looks when driving by. Nice lush trim lawn surrounded by picturesque landscaping or a beautiful front door draws immediate positive impressions.
Never renovate in contrast to the neighborhood’s appeal.
For instance, never reduce the number of bedrooms in a family friendly neighborhood. The same goes for never reducing the size of closets or master bathroom just to install a Jacuzzi few appreciate.
Avoid Hot Markets
Hot markets only become hot when the word is out.
By then it’s too late to find good deals. Sure, some appreciation occurs but the new investors (the late buyers) end up buying high hoping prices keep rising. Very risky when buying at the peak of the market and losing your money.
Discover neighborhoods evolving into desirable communities.
Find the Hidden Markets
Distressed sellers offer great deals.
Don’t expect to make a killing at a foreclosure auction because most are in dire need for repairs.
Instead, find distressed sellers who haven’t put their properties into the market yet.
For instance, a family wanting to sell Dad’s home after he passed away and couples going through a divorce make ideal sellers. They need the money while the buyer gets a home in good shape.
How do you find distressed sellers? Lawyers specializing in estate planning or divorces always know of potential distressed sellers well in advance of anyone else.
Knowing Your Up-Front Costs
Understanding how much you must pay in investment costs allows you to know if its a good deal or not.
Besides the purchase price and your buyer’s agent commission, figure out repairs. You must estimate the costs to repair electrical and plumbing problems, fix the cracked foundation or dealing with pest infestation.
Forget about working a few weekends and adding a little paint. Unless you know how to fix plumbing and electrical issues yourself, you risk errors making the property unsellable. Make sure all repairs up to code or face big fines and further repairs.
Failing to budget for closing costs, repairs, insurance, property taxes, utility costs, security of the property, and all other expenses results with you losing money.
Managing Your Risks
Never go deeply into debt when purchasing properties.
Try to put at least 20% down as it eliminates private mortgage insurance often yielding lower interest rates on the loan. That saves you a lot of money over the years paying off the loan.
Maintain a large cash reserve. This reduces the risk of selling the property quickly at a loss. The reserve cash carries the property through slow markets. A large cash reserve also pays for unexpected repairs. Going to a hard money lender to get $25,000 to fix something means high-interest rates eating into your profits.
In conclusion, how to get better real estate deals begins with knowing what an average deal looks like.
Therefore, avoid average deals. Instead, focus on achieving these objectives:
- Paying fewer taxes improves your profits.
- Figure out the best and highest use for your properties.
- Understand the market.
- Creative financing improves profitability.
- Avoid hot markets and find hidden markets.
- Know your upfront costs.
- Manage your risks.
Don’t do it yourself. Hire a professional property management company to do all the time-consuming legwork (like advertising rentals, finding good tenants, collecting rents, evicting bad tenants) and record keeping (to verify tax deductions).
Contact Us to learn how we manage properties to achieve greater profits for our clients.
Steven Rich, MBA – Guest Blogger
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