Note: Once again, I am diving into the fictional world of my mind to bring you a story based on the ABCs of buying, selling and investing in Real Estate, The story is fiction, but the advice is real!
Quincy was a retired medical examiner. He had worked his whole life checking out dead bodies for the local police. In his retirement, he wanted to start checking out homes instead. He called me one fall Saturday morning seeking advice on buying real estate. He said his first task would be to find a new primary residence to replace his downtown condo. He wanted something that was a little run down so he could experiment on fixing up a home. Once he finished that project, he wanted to dive headfirst into real estate investing (REI). Quincy had been saving his whole life so he quite a bit of cash available in his savings account as well as a Self-Directed IRA, from which he could draw funds to purchase real estate. He wanted to know the costs associated with real estate and didn’t want to have to bother me all the time seeking numbers. He asked if there were any good sites for him to use to figure out real estate cost.
This is what I told Quincy
I first congratulated him on having set his goals on saving with the intent of investing in real estate during retirement. I told Quincy that I was one of two Certified Real Estate IRA Agents in north Texas and would be happy to assist him in finding homes for his IRA to invest. I even told him to seriously think about setting up a LLC using IRA funds so he can more freely invest in real estate without paying the numerous fees associated with IRAs. He could also bring in partners with the LLC if he wanted to do so. As far as costs, he was right in approaching a real estate professional before even looking. Many home buyers, both experience and newbies, sometimes forget that there are additional costs to consider beyond the price of the home. For his fixer upper, he needed to be sure to do repairs that would bring the most value to the home after they were done. Kitchens and bathrooms are always favorites for home owners to update, but do they bring the most return on that investment? You also need to realize that there will be costs associated with closing on a home, even if he buys a home with cash. Finally, he needed to educate himself on the various costs with the different REI strategies existing today. Luckily for Quincy (and for all of us), there are sites available online to help with determining real estate cost. Here are three of the best.
1. Home Repairs/ROI – Quincy’s first task was to buy a fixer upper, live in it for a year and then sell it. He wanted to learn and experiment on fixing up homes. What he really needs to know about cost is not only how much the repair will be (which since Quincy is doing it himself, he can find materials cost at any of the big boxed home improvement stores), but also how much he will be getting in return on the price of the property after making the repair. For this information, I am sending him to the Cost Vs Value website. This site outlines what kind of percentage return on value you can get for each repair cost. They break it down by geography so you can get a pretty good idea on value based on where you live. For Dallas, the three costs bringing the most value are: Attic Insulation (100.9% return), Manufactured Stone Veneer (108%) and Garage Door Replacement (96%). This changes every year based the current material costs so you need to check back with every new report. For example, roof replacement used to bring the most in return, but it is now only bringing about 70% return.
2. Closing Costs – When buying homes, there are certain costs buyers will have to absorb, no matter if the transaction is cash or finance. Title companies have to be paid for their work. How much these costs vary from Title company to Title company, but many of them have very similar costs. Since most buyers get caught by surprised by these costs, it is always a good idea to know what to expect when sitting down at the closing table. Providence Title has a great calculator that you can use either on your smartphone or your desktop. It is a productive app to have for buyers because it allows you do a quick calculation where you just input sales price and terms of your loan (if it is a financed transaction) to get a quote on basic facts. If you want more accurate costs, you can also drill down into the worksheet to add more detail. Either way, the buyer should come away from the experience with a good idea of what will be needed to close on the property. There are several such apps available so just find a title company you like and use their app to figure out your costs.
3. Investor Costs – For Quincy, he is planning to do more than just purchase one home. He wants to purchase his first property and live it in for a year, which is smart because that gives him the ability to bid on HUD homes which require a year’s occupancy in the home. Once he sells his first flip, he wants to hit the ground running with buying more flips. REI has a whole set of different costs to keep in mind. The absolute best site on the net to find calculators to help figure REI costs is biggerpockets.com. On this site, you have six calculators to use to help with REI including a flip and fix calculator. As you can see from below, it is a four step process that will really drill down what one can expect to spend on a flip and how much return they can expect from the resale of the property. It is almost too brutally honest as it makes one realize right away that HGTV flip shows, where they make tens of thousands of dollars. are not really well grounded in reality. I can’t recommend a better site for REI and figuring out real estate cost. Check it out.
With real estate cost, you have to be prepared to spend more than the sales price of a home when buying. If you buy a property and then want to fix it up a bit, check out how much of the cost you will be getting back in return when you sell the home. If you want to know the hidden closing costs, seek out one of the many title company calculators available online. Finally, if you are in REI, check out Bigger Pockets, by far the best site for investing in real estate.