Acquiring Equity

Real estate investors live and die by their ability to add value. With no extra value, there are no profits. This is true with any business, but what makes real estate such a great business and a great investment, is the variety of ways that you can add value and cash in on big profits. Here are three ways you can add value to your possessions.

Upgrades and Repairs: OK, this is the obvious one and is why fix and flippers can earn money. Some repairs add a great deal more value than it costs to do. The more creative you are with the improvements, the more value you can add. By way of example, I have a customer that adds square footage to each house he buys. He actually likes the inner city properties since they’re the hardest to include square footage. You either need to complete an unfinished basement, or add a second story. There’s not typically enough land on the lot to add an addition by increasing the foot print of the property. This client does lots of basement finishes and “pop tops,” but where he’s made the most money is the basement that’s just 5 or 6 feet deep. He will go in and dig out the basement to a full 8 or 9 foot height and then complete it. Something most investors wouldn’t think of, so he is able to get the deal many other investors pass on. I also have seen some investors find homes which don’t really fit into a neighborhood and they make them match. This could be restricted bedrooms or bathrooms or funky floor plans. All that can be changed. Clearly many cosmetic fixes like bathrooms and kitchens include a good deal of value too. There is a lot more to it than this, but the idea is to buy a property at its true ‘as is’ value, (do not over pay), and then add value with the repairs and upgrades.

Owner Finance: I really like this one because it’s so easy to add value with very little to no work. You’ll have to wait to cash in on your profits, but it’s a way to increase a sell price significantly. You can also use this strategy to defer tax gains over a few years, instead of taking a big hit all in 1 year. When you have a property for sale there are a limited number of buyers for the home, although right now that pool of buyers sounds pretty large. If you are able to increase the pool of buyers, then the requirement for that one home increases, which forces the price to go up. Someone that cannot qualify for a typical loan, limiting the supply of homes to pick from for that buyer, will probably purchase your property. That also increases the price. You’re adding value by giving them the chance to get a house that they normally would not be able to own. For this value, you should be compensated with a higher price and a good interest rate on the profits, as you wait for the buyer to refinance and pay you off in full.

Shared Units: This is one area of real estate that I have not dabbled in, but it’s very inviting. The idea here would be to offer your property to multiple buyers. You are seeing this a lot in resort towns. It is always a vacation or second home. They are pretty enticing aren’t they? We decided to go because they offered us free tickets to Disney. They were very good at selling the “thought” of the time talk and had my ex wife sold. She asked me to proceed with the deal, but I could not bring myself to do it. I told her that I wasn’t familiar with an emotional purchase and that we needed time to think it through. As we rode back to the hotel that afternoon, I started thinking about the math. Each unit can be sold to 52 different people because your purchase only gets you 1 week annually. Add that to the annual maintenance fees and the numbers are staggering. I know people who have flipped time shares successfully, since you can get them for free or near free on Craigslist, but it’s not an investment I was interested in. With that said, I have considered doing a half or quarter share on a home in a ski town in Colorado. In this scenario, you’re sharing a home with 1 to 3 other people so there is a lot more flexibility. You can use or rent out your weeks and you can be guaranteed valuable high demand weeks each year. It is a way to acquire a second home without the full expense. From the seller’s point of view, it is a way to get more for the home. 1/2 a share of a house will cost the buyer more than 1/2 of the fair market value. I’ve seen business plans from investors that would buy a home and quarter share it out. The idea was that after they improved the property and sold 3/4 of the house to 3 different buyers, they would have the previous 1/4 clear and free. Obviously this strategy will work best in places where folks want second homes. The downside is if there are any improvements or significant issues.