How Savvy Investors Profit 4 Times When Dealing in Foreclosures
Among the advantages you will enjoy in the real estate foreclosure market is your opportunity to profit four times. First of all, you get the initial bump in value when your “distressed” property is purchased at a discounted price.
Real Estate Investors Buy Foreclosures At Discount
The investor gets the foreclosed property at a low price because it needs fixing. (It’s called “distressed housing“)The lender took a look at how much it would cost to fix the property by today’s construction and contracting standards. Rightly enough they concluded that the property had to be fixed in order to merely maintain the value, let alone achieve a profit.
Most experienced investors can accomplish that very same work for thirty to forty percent less cost because of our active involvement in the process.
There are reasons for the discounted foreclosure pricing
Some reasons are competitive and some are based on just the sheer volume of foreclosed properties out there. The consequence of this over-supply is one piece of establishing pricing. The other is simply the “cost to fix”.
The competition and the cost to fix must be measured against the prevailing values in the particular neighborhood given the reduction in value that has taken place over the last several years. You as an investor or rehabber are positioned to profit where the foreclosing lender cannot.
Thus the very first benefit you derive is a profit – on the books, not in your pocket – of the restored value measured against what you paid for the property and what it costs you to fix it. So there is a bump in value right there.
If you maintain personal financial statements, and you certainly should, your wealth just went up by that differential, by that positive increase in value. That’s a value increase from simply bringing the property back into service.
Mortgage Expense Lower (and Maybe Even Some Operating Costs)
Secondly, because your primary costs of ownership are reduced, your mortgage–and perhaps even taxes and insurance–will be a significantly less than had you bought that same property at the top of the market.
Meanwhile, the demand for rental housing has gone up because of displacement resulting from these foreclosures. And the housing needs of those sidelined from buying by the aftereffects of the housing recession add to demand as well.
So, while rents are holding reasonably firm and perhaps rising in your area, your holding costs will be less. This means you’re going to enjoy generous rental income as long as you own the property.
Faster Rate of Market Value Appreciation
Thirdly, we are still in a swing period in real estate values. You will find that as this progresses, as the remaining foreclosures are absorbed by the marketplace most experts agree that market values will recover. And that could be a jump of twenty, thirty, forty percent over the your “cost basis” (the amount you actually invested). This is extraordinary appreciation when compared to the 3% annual market value increases experienced historically. Therefore you have unusual opportunity for extraordinary appreciation in the near term.
Important Tax-savings Add To Profit for Those Who ‘Hold’
And fourth, there are important tax benefits available to those who choose to hold their properties. Folks who promote the concept of “flip this house”, and getting in and getting out, never really focus on tax consequences. The fact is that when you buy and sell within less than a year, or buy and sell as a primary business activity, the IRS will treat you as a Dealer.
We know that speculators are inherently “dealers” in the short term. So are “flippers”. What does this mean? It means every nickel, every bit of profit made on the quick resale of your foreclosure property is taxed at ordinary income tax rates. Under today’s tax laws, personal tax rates are generally in the range of thirty to forty percent. When state taxes are taken into account, total taxes owed can be even higher. This takes a serious bite out of profits.
There is an alternative available to reduce these high taxes
When a property is held for “investment purposes” (think of the stock market and pension account securities) and held for a year or longer, then the profit is measured at capital gains rates. Taxes on capital gains are today capped at fifteen percent for most investors. Compared to thirty-five percent, fifteen percent is money in your pocket as an investor, adding to your working capital, added to your wealth– just by virtue of reduced taxes. Real dollars. (For more on capital gains tax rates CLICK HERE.)
Great Profit Opportunities Unique To Real Estate Investing
These are important advantages for real estate investors. Compared to other investment and savings vehicles, these are extraordinary advantages. Just stepping up, first of all, and buying a distressed foreclosure property because you have in hand a system to quickly and efficiently restore value, has always been a fast track to wealth-building in real estate.
Secondly, when this process restores value rather than creating value, it is a very conservative objective readily realized.
Third is the fact this market is accessible at any level. Of course the recommendation would be, if you’ve not done it before, start with one property. Don’t start with ten. I’ve seen people do that, and they’ve simply become mired in too many projects, too many contractors, and too many responsibilities in a single period of time.
Consider affordable housing as a conservative investment
The fact that the demand for affordable housing is undiminished and growing provides a market both for sale and for rent. And the comparative cost advantage if you want to be an investor or rehabber, as opposed to a builder, is that so-called “used” housing will always give you a pricing advantage, a cost advantage, over both existing homes and new construction.
Finally, if you’re going to choose a foreclosures marketplace to play in, and if you are approaching it as an investor, real estate in general is best understood as a “conservative” investment. Housing is a commodity which will always be in demand. And you have choices, “niches within niches”–
One may choose to specialize in penthouse apartments on the boulevard, or bungalows in working class neighborhoods. The opportunity for acquiring discounted multi-unit apartment buildings is attractive for the same reasons and certainly not to be ignored.
Conclusion
All things considered, today’s foreclosures market provides for us unprecedented opportunities. The potential for multiple profit centers is there, yours for the taking: There is (1) profit from the initial restored value– just by bringing a property up to today’s pricing. (2) The generous rental income, the enhanced cash flow or spendable income is available. There is (3) ongoing appreciation as markets continue to recover. And (4) important tax benefits serve to subsidize our continuing investments.
This “perfect storm” combination of benefits and profits available to us in fact represents an extraordinary opportunity.
Which is why we do what we do.
Philip Elmes