The adage “location- location- location” is often parroted about the real estate investment world. Of course it is true and incredibly important. The difference of one side street closer to the shore or further from a major road can make a difference of 30% or more in value. If you are looking at properties as investments though there is another consideration nearly as important. Timing is just as essential as location if the goal of a transaction is to realize a profit.
Real Estate Investing to Yield a Return
If you are buying a home for yourself you are looking at neighborhood, schools, value, and comfort. These are all considerations when appraising a property as well for investment potential but are lacking the key piece for profit. Real Estate as a long time purchase and hold position is for landlords and rental experts or for serious risk capital investors. Most real estate investments are meant to be short term positions for fast turnover. Therefore, it is more important to look for properties based on speed of turn (how long to sell and recoup capital and hopefully profit) then to look for perfect homes.
Location and desirability play a part of course in speed of turn but there are many other factors. $125,000 entry level homes will sell fast in nearly any market. If you can buy for $100k, do $4k in carpets and paint then sell for $120k for a 30 day turnaround time then after costs you will have a $10k return in 30 days or 120% annual return.
Compare this to a perfect property that you tie up $500k in and hold 6 months. To realize a “super pay day” of $50k. The big pay day is actually only a 20% annual return on your investment. That is obviously still a respectable number were you so fortunate, but it is a long way from 120%.
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The point is not whether you should look at big or small. The point is that the time your money is invested in one place it is not doing anything else for you so it is essential that you calculate realistic sale times into your purchases.
Look at Price Comps and Time Comps
The “desirable” areas in any market can change quickly. In the recent upswing in sale prices in the US housing market retirees that had been holding their home for better prices are putting them on the market en mas and new home construction has increased drastically. Looking at 12 month price comparisons but neglecting to see that 20% of the homes in a neighborhood are currently for sale is a recipe for disaster in hold times and profits at sale. Either a short sale or a long hold is inevitable. Any market where average sale times exceed 90 days really needs to be adjusted down in value so you can make the sale a little short if need be to speed it along.
How You Influence Sale Time
You can directly control several factors. The first is curb appeal. Spend some money on professional landscaping or lawn and garden service. A few hundred dollars on a great first look will easily be made up at negotiation for the sale price and speed of sale.
New paint and carpets is almost always a must. Most just consider it as an expense to be factored in. It is essential to match the repair and refurb to the area and value of the property. While budget carpets work in an entry level home you will need top quality flooring for a $500k home. Make sure to order the work as soon as you take ownership.
Paperwork can have a huge impact on sale times. Apply for a real deed and title the day you take ownership. The quit claim deed that comes with tax sales and many bank foreclosures will cost you time and money in the long run. Since many banks will not finance on a quit claim deed you will not be able to close and get your return until it is resolved anyway. A day at the city clerk office will pay for itself in hand filing for conveyance. Some agencies can do quick move conveyance all online for a more reasonable fee and much faster than a typical attorney.
Most importantly, put the investment property on the market immediately. Many times investors end up holding a property for 30 to 60 days “getting it ready.” If somebody wants to make an offer before it is all “ready” then certainly make it known that is available. You can then make a decision based on profit now versus potential profit in future as to whether to hold or sell early.