"Tom, can you really make money investing in nice homes in nice areas? Everything I've been told says to buy run down homes in not so nice areas."
We literally had two construction contractors in our office a few months back scratching their heads at the thought of making money from real estate without having to fix up properties.
Well, not only is it possible, it's my favorite strategy!
Before I explain why, let's look at buying run down properties a little closer.
From my experience investors will buy properties that need some work for two reasons:
Now I can understand the goal of making some quick cash from this but is that really "investing"? Don't think so. Will this make you passive income that you can live off of one day? Ah, not really. Is this more like creating a job for yourself? Yup, it is. So although there is money in doing this be aware of what it really is.
You'll often hear people brag that they did a deal from their cell phone buying and selling run down properties without even seeing the thing. It sounds so exciting that people listening to that don't realize the person pulling that off has likely been in the real estate business for years and has a massive network of people finding these types of properties and another network of people interested in buying them. Don't buy the hype.
Now here's a strategy that I can live with. By fixing it up the investor is creating equity in the property. If homes in the area around going for $200K and they bought this one for $160K and then put in $20K worth of work into the home they now have $20K in equity that they've created. I like it.
And now they can rent out the property to create some cash flow.
I can truly respect this rental property investing approach. It's a great idea and will no doubt create a prosperous future for anyone who continues to do this.
However, is there a better way?
I think so...let me explain.
Investors typically use the strategy described in point #2 above because they can get a property for less than fair market value (because of its condition).
As a result, their carrying costs may be lower and their cash flow position will be stronger when they rent it out.
Sounds good, right?
But here's what most people forget. It will take you a few months to fix up the property and then rent it out right?
Who is paying the carrying costs of the property during that time? You are.
Is your time worth money? It is, so what is that time you are spending on the property costing you? More than you think!
There's also some real hard dollars spent to fix up the property? Who is spending that money? You are.
Who is dealing with the contractors used to fix up the property? You are. Or worse yet, who is working to fix up the property themselves? Ouch, hopefully not you.
Now, if you focus on rental property investing with nice homes in nice areas there are some real benefits.
And what happens to the person who is fixing up the property and then runs out of money? Can they rent out the property for top dollar? Not likely. Can they sell it and recoup their costs? Possible, but difficult.
Recently a client who used the "nice homes in nice areas" approach got talking with someone who bought a run down home to fix it up and rent it.
That person was driving for 90-minutes after work each night and on the weekends to fix up the property. From what I understand they almost threw in the towel on rental property investing altogether.
The toll on their life was just too much. He couldn't believe there were other rental properties investing strategies he could have been using that would have saved him the months of driving back and forth. There are!
Can you imagine? He almost quit real estate investing. Before you let that happen to you track down an investor you can learn from working with nice homes in your area. It may save your investing career!
To check out a few good things to consider before you buy that "deal" of a fixer upper click here...
To return from Rental Property Investing and go to the Residential Real Estate Investing Guide click here.