Looking to make the return of a lifetime? It’s much closer to home than you think. Have you ever considered that the home you’re living in could be making you money? Or that it could be making your money even while you’re still living there? It’s true and much more probable than most people realize.
The real estate market tends to follow a very predictable trend that you may hear professionals call a 10-2 cycle. What this means is that the market will tend to climb for about ten years before we see it fall significantly for two years. Often these up and down swings trend with political elections tends to result in incentive programs for buyers and interest rates that fluctuate accordingly, thus driving the market up and down.
Making It Work For You:
So how do you turn this into a profit? The home that you’re living in, whether you carry a mortgage or not, will increase in equity based on these trends as well. Equity is the amount of money that the home is worth less any balance that is owed. Learning how to follow the real estate trends in your local market will allow you to make your home “work for you,” and profit you the return of a lifetime.
Profiting From Your Primary Residence:
Here’s how it works. A hypothetical owner bought their home two years ago. The market has been on an upswing and as such, they have built a significant amount of equity in the home since they made the purchase. If the homeowner were to sell, they would make a great profit. The homeowner isn’t necessarily looking to sell, though. Their intention is to keep this home, but they want to use their investment to make passive income.
One option for the owner would be to look into a cash-out refinance. What this means is that they pull the equity out of their home while the market is “high,” thus giving the owner a large sum of unrestricted funds. This is especially effective if they can lower their interest rate by refinancing. This is possible if the owner has continued to make timely payments and kept other financial obligations in good standing.
Being that the market is “high” when they do the cash-out refinance, the best option is to invest this money, either into a high interest earning account or to use this to buy an investment property. Typically, there are multiple payout frequencies to choose from when investing money into a high-interest bearing account. If the amount being invested is significant enough, and the interest is also high enough, this could generate a handsome profit every month. However, interest rates tend to be higher with less frequent payouts.
Should the owner choose to purchase a second property as an investment property, they could indeed receive a monthly cash flow by renting out the second home. Depending on the amount invested, the owner may buy the second property outright, or even consider taking out another mortgage. As mentioned earlier, rents tend to be much higher than mortgage payments and, as such, the owner would receive the benefit of the rent minus whatever was due monthly to the mortgage company thus receiving a consistent flow of additional monthly income. Then, not only do they have the income, but also invested in another property that they can also use the equity they build to continue future investments.
Another way to make the return of a lifetime is in the business of flipping homes. The term “flipping homes” is one that is being made much more common over the last few years with the growing awareness being highlighted by multiple different television series that highlight the profit potential. Essentially, what is meant by the term ”flipping homes” is that you buy a home for a great deal, fix it up, and then sell it for much more than was originally invested. Knowing your market is especially important when considering getting into the business of flipping homes. The buyer wants to make sure that they get the best deal on the initial investment to make the highest return. So, they should look to buy when the market is “low,” meaning that home prices are significantly lower than average, or lower than they have been in the recent past.
Once the buyer identifies that there is a low market, to maximize the profit potential, they look for a home that is significantly discounted based on age, or repairs that are needed. At this point, it is extremely important to pay close attention the kinds of repairs that are needed and how much they will need to invest in improvements. A home inspection performed by a licensed professional is highly advisable to identify any major repairs that might go unnoticed by the untrained eye. Buyers will want to focus on homes that are in need more of cosmetic upgrades than larger high-ticket repairs such as a new roof or any other significant structural damage that is identified as needing to be fixed.
For buyers not intending to pay cash for the investment property, but rather to take out a mortgage might consider special loan products that are tailored to the needs of owners that do not intend to keep the home long-term. Depending on how long the buyer plans to keep the home, they might consider an adjustable-rate mortgage that typically gives them a significantly lower interest rate for a set period of time, at the beginning of the loan. This helps to keep the out-of-pocket expenses as low as possible throughout the time the buyer is fixing up the property.
The buyer will make the necessary repairs to the home and often include strategic cosmetic improvements that significantly raise the value of the home as well as make it more aesthetically pleasing. Generally speaking, repairs are prioritized with health and safety concerns first. Followed by any significant updates that need to be made to outdated systems that make the home functional such as plumbing and electrical updates.
While the owner could profit from a sale almost immediately after improvements are complete, it is most advantageous to wait until the market is back “up,” to then list the property for sale. This allows them to sell it for a much higher price based both on market conditions, as well as the improvements that have been made to the home.
Making The Most of What You’re Working With:
Both of these options can be extremely profitable. There are, however, ideal conditions under which using both options can help maximize return. It is important to understand when to exercise each option based on market conditions and personal finances. Also, knowing the loan options that will work best with your investment plan, can help to set you up for success with the potential to save tens and sometimes hundreds of thousands of dollars.
The Prime Time to Use a Primary Residence:
The majority of the population that saves money has less than 6 months of reserves set aside in liquid assets that could be used for the purpose of investment. Using the home that you are currently living in is an excellent option to look at for people that are looking to invest, but maybe don’t have a lot of cash on hand to purchase, or invest in fixing a place up. This option tends to have the highest return on investment when the intention is to keep the home for a significant period of time as well.
This option is best when the owner has lived in the home and made timely payments for at least two years allowing the home sometimes to increase in value. An optimal opportunity would be that the owner intends to keep the home that they are living in for a significant period of time as taking out the equity will increase the amount of money that they owe on the home. Thus, keeping it for a longer time gives them the option to do the cash-out refinance over a traditional mortgage period such as 15 or 30 years. This gives them the cash they need out of the home, but still keeps monthly expenses low.
What to Watch Out For and Protecting Your Primary:
Let’s look at a hypothetical situation. Let’s say someone buys a home for $100,000. We will imagine that the market is on the ten-year climb, and the home increased in value to $140,000 over a period of two years. They owner only owes $80,000 based on payments made and the amount of money that they put down. So we would say that they had $60,000 worth of equity in their home. If they take do a cash-out refinance option, and accessed $50,000 of the $60,000 worth of equity, they will then have a mortgage payment based on $130,000 rather than the $80,000 that they started with.
This option would not be ideal for an owner that was planning on selling their primary residence shortly. By taking out the equity that their home has accumulated using a cash-out refinance program, it essentially resets a mortgage and adds the amount of equity that was taken out of their principal balance, or the amount owed. If the home is valued at $140,000 and the owner now owes $130,000, if they were to sell the home, there is only the potential profit of $10,000, of which the majority will probably go to closing costs and associated realtor fees.
When Flipping Pays Best:
Flipping houses can be one of the best ways to make the return of a lifetime. This option is best for an investor that is looking for a larger return over a longer period of time and isn’t dependent upon a monthly cash-flow or a lump sum income to expect from the home. It works best when the investor has cash up front that can be used both for the down payment or cash purchase of an investment property as well as for the upgrades and improvements to transform a fixer-upper.
Having the cash up front makes negotiating with a seller much easier as they don’t have to go through the ins and outs dealing with a lender. Often times, buyers are able to purchase at a lower price when paying cash. Liquid funds also make paying for repairs much more convenient and saves money in the long run. Often times, investors and owners will put costly repairs on credit which results in the additional cost of long-term interest payments.
Another thing to consider when flipping houses to maximize the return is the state of the market. The lower the market is, the lower the purchase price will be. The lower the purchase price, the higher the return will be once an investor fixes up the home, and the market goes back up, and they now have the potential to double or sometimes triple their initial investment.
When a Flip Might be a Flop:
There are certainly times when a flip can become a flop. Buying when the market is high means that an investor is paying top dollar for a property that will eventually decrease in value. Timing is everything. An investor looking to make a significant return will never buy at the peak of the market. Additionally, certain precautions should be taken when buying a fixer-upper that if overlooked can be costly mistakes.
Following the traditional ten-two cycle, it is important to know where a market is at along that curve. There are some very helpful tools available that help investors to identify where a particular property is at in the curve of its valuation. Looking at trends in the area, tax assessments, and comparing similar properties listed for sale in the area are all good indicators of the current market conditions.
Every investor knows that buying a fixer-upper is always most profitable when the repairs are mostly cosmetic and larger ticket items like plumbing, and roofing is in decent condition. Unless someone specifically has experience in this field, it is highly advised to get a home inspection report that will indicate all of the items that are in need of repair and will especially highlight those larger, more costly defects. This allows an investor to make an educated decision regarding the return on their investment after estimating the cost of repairs.
Real estate investing is an incredible way to make the return of a lifetime. With the market as volatile as it has been and interest rates at record lows, there has never been a better time to invest in something that is sure to pay you a higher return than you would find in nearly any other market. However, it is just as important to the success of return that buyers are educated on all of the available options to be able to determine how to best invest in the real estate market. Mistakes can be costly, but the right moves can make millions.