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Robalo Drive Remodelling

In the past few months, I've noticed a lot of interest from clients and friends regarding the remodeling and renovation of investment properties. Because of this interest, I've decided to document my latest remodel project on this web site.

Choosing the Property

For Before and After Pictures, please go to:

http://www.kodakgallery.com/I.jsp?c=8z5vi.81behy8z&x=0&y=-al6yvi

There is an old real estate saying that you make your money when you buy the property, not when you sell it. It's crucial, in my opinion, to pay no more than 70% of what the property is worth. To do this, you must have a thorough knowledge of the market and consistently look at the inventory as it comes available. For example, I probably look at 600-1000 properties a year and only buy one. You don't have to take it to the extreme that I do but it is important that you know your local market very well.

There are many different types of real estate investment:

  • Personal Residences 
  • Flips 
  • Rentals
  • Land

I always tell my clients that before they start investing in any other type of real estate, they should make sure that their personal residence is a good investment. Personal residences have tax advantages that can't be matched by any other type of investment. If you live in your house for two out of the last five years, the profit from the sale of that house is TAX FREE! This is the best loophole in our tax code. Example: You buy your house for $100,000, do some basic renovation (usually floors and paint), live in it for two years and sell it for $150,000. That $50k you made on the house-you don't owe a dime in taxes on that. Compare that with an investment property where, at best, you would pay a 15% capital gains tax. The capital gains tax doesn't sound like much but on that $50k profit, it would take a big $7,500 chunk out of it. That would cover your house payment for an entire year.

Unlike your personal residence, the biggest disadvantage of flipping a property is the taxes you will pay. In most cases, you will pay taxes on whatever tax bracket you're in. So with the same example above, if you're in the 25% tax bracket, you would pay $12,500 in taxes on your $50,000 profit. This stinks but there are advantages to flips also. Mainly, it allows you take take your profit quickly and frees up capital for other projects. I know what you're thinking. Wouldn't it make sense to rent the property out for a year or two and pay the 15% cap gains tax instead of a 25% to 35% ordinary income tax? In my opinion, NO. Rentals do have their place but in my extensive experience, you can spend a lot of time and money fixing a house and in a lot of cases, the renters will manage to trash it in the year the live there. I've had investors who have to replace the carpet every year. This can kill your profit margin. I would rather take the hit on the taxes than deal with the headaches of having a renter.

But there are plenty of investors who do make a lot of money renting properties. The whole key is to have a great cash flow so you can afford to cover expenses that come up. Currently, in the Austin market, it's hard to generate this cash flow because property values have appreciated so much that they payment is usually more the you can get with rent. I don't want to steer you completely away from buying rentals; you just have to make sure that you get them at a good enough price that your payment is more than covered with rent.

Finally, there's land. The advantage of raw land is that it requires very little work. The disadvantage is the holding cost can be great considering that it's not generating any income. Property tax rates in this town are outrageous. If you by a $100,000 tract of land, you'll pay around $2500 in taxes on it. Remember, this doesn't include any loan you may have on the land. I think land is a good investment for someone with a lot of cash who wants to hold it in a long term investment. We all know areas around Austin that have skyrocketed in the last few years. Just like with the other investments, the key is to buy the right property. Also, if you can get an agricultural exemption (usually on rural properties), land is often a great buy because the property taxes are virtually non-existent.

So, now that you know all this, you mush be wondering why I choose the little house on Robalo Road. As I mentioned earlier, I look at a lot of properties, either for myself or my clients. On nice Sunday, I was scheduled to show a client some condos when this listing pulled up on the Multiple Listing Service. It caught my eye because I knew the neighborhood very well, since I had sold the house three doors down several years ago. The property was a great price and more importantly, it was a great price per square foot for the neighborhood. Price per foot is the main stat I look at when evaluating properties. It can quickly tell you if the house is priced well or too high.

Since this property was in my client’s price range, I urged her to look at it even though she was mainly interested in condos. When we went over there, she was shocked at the condition of the place. Since she was a first time homebuyer, I can't say that I blame her. The tenants kept it pitch dark, had tons of crap everywhere, and the place smelled like the humane society. I wondered how people could live like that. She decided it would be too much work for her so I asked her if it was ok if I made an offer.

When she said yes, I went straight to the office to write it up. Although the place was disgusting, I realized it wouldn't be nearly as bad without the tenants stuff there. It really didn't need much work but you couldn't tell by its appearance when it was occupied. Needless to say, my offer was contingent upon the tenants vacating the property.

So, here it is a month later. The tenants are out and I have closed on the place. The next step is...

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