How to Make Smart Real Estate Investments
Purchase Price vs. Resale Value
If you’re like me and trying to make smart real estate investments with every purchase you make, it’s always important to understand two things…
What’s your home worth today in its current condition?
What your home’s resale value could be with specific improvements, based on current comparables?
The most important thing to note is that no one has a crystal ball to truly know what the real estate market will be like in two years, or even in the next six months. Every real estate investment decision you make, needs to be based on today’s market conditions and appropriately planned to allow for cushion in both your renovation budget, as well as your resale value.
1
Resale Value
Pretty please with sugar on top, don’t take your Zestimate as gold! A computer generated number is only as good as that. Zillow is merely looking at recently sold homes in your neighborhood that are relatively the same size and offer similar number of bedrooms and bathrooms. In no way is it accounting for finishes, the architectural style of home, what specific block you are located on, the layout, and overall care of the home.
Ultimately, I would highly suggest consulting with an experienced realtor to better understand the market value of your home with and without any improvements. However, if you for any reason don’t want to take this suggestion, I would recommend doing the following
Pull all recently sold homes in your neighborhood, within the last 1-4 months.
Narrow down the comparable homes to only those that are a similar style of home (2-story, rambler, etc.) and size (bedroom and bathroom count + sq. footage).
From there, compare the interior photos to your home’s finishes and layout. Take note of things such as: stainless steel appliances, open concept kitchens, formal dining rooms, owner’s suite, walk-in closets, updated light fixtures, hardwood floors, etc.
Depending on where your home compares to the line up, this should give you a general sales price range that you could expect for the neighborhood. You can use this exercise to determine both today’s value and what the home could be worth with some improvements.
2
Time of Year
Spring and summer are the most active times of the year for real estate. Rental leases are ending, children are on summer break, and families are ready to get outside. In my opinion, the minute you start to see the first signs of spring, you should begin prepping your home or real estate investment property for sale. It’s a great opportunity to list towards the peak of the year while beating out some of your summer competition that can drive up inventory levels, and lower your potential return on investment through multiple offers.
Take for instance spring of 2021, some houses were receiving upwards of 20-30+ offers in one weekend. Now that we are officially in summer, the market is still strong, but most homes are receiving closer to 1-7 offers (if priced well at market value). Timing the market is impossible and there is no telling what the future holds, but year after year, spring tends to be a frontrunner of the four seasons here in Minnesota.
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3
Real Estate Commissions and Closing Costs
It is important for every investor to take into account real estate commissions and closings costs when calculating their return on investment. Often times when I’m chatting with first time investors they are merely thinking through the acquisition cost, renovation budget, and resale price. However, accounting for holding costs (utilities and mortgage payments) and closing fees (commissions and closing costs) is another large factor that can impact your take home amount.
To give you an example, the state of Minnesota generally charges somewhere around 6% in realtor commissions and 1% for seller closing fees. For a $500,000 house, this would amount to a reduction in profit of $35,000 that should be accounted for when running your numbers upfront.
4
Capital Gains
Capital gains tax is an important factor to keep in mind when thinking through your resale value and return on investment. Although it doesn’t affect your paycheck at the time of the sale, it will impact your tax payout at the end of the year. It is important to discuss these numbers with your tax provider to plan appropriately.
Understanding Capital gains Tax
If you lived in the home you are selling for 2 of the last 5 years (does not have to be consecutive years), a single person can exclude up to $250,000 worth of profit from capital gains tax and married persons (joint returns can exclude up to $500,000).
Short-term capital gains (not having lived in the home for 2 of the last 5 years) are taxed at typical income rates, as high as 37% for high-income earners.
Long-term capital gains are taxed at 0%, 15%, or 20% dependent on marital filing status and income.
If you have capital losses elsewhere, you can use your gains from the sale of your house to offset your losses.
No matter who you are and how experienced you may be, leaning on professionals is always a good idea. Whether it be a licensed realtor, tax accountant, or financial advisor, by taking proactive action steps upfront, you can hopefully minimize your learning curve and obstacles that may pop up along the way.
Whatever you decide with your investment journey, I am cheering you on!
Jen
Real estate investor, landlord and DIYer, Realtor, Business consultant, Globe trotter & Converting vegan.
