Renovation Financing: Knock…Knock…Investment Opportunity?
I by no means think that folks should be looking at real estate solely as an investment. First and foremost you need to think of real estate as a roof over your head and a home for your family. However, that does not change the fact that the purchase of a home will likely be your single largest investment of your life!
It makes sense to do all you can to make it a good investment! Forbes Magazine just published an article on the Top 10 Cities to go from Renting to buying. A few points that the article made:
- The article identified cities where the purchase of a home is a better investment than normal.
- The cities on the list have the biggest discounts on the premium to buy.
- The cities, or more accurately MSA’s (Metropolitan Statistical Areas), have big projected increases in home prices over the next 5 years.
I believe that when the market shifted from sellers to buyers, coupled with the bursting of the housing bubble and the recession, the opportunity to create equity has shifted from the seller to the buyer.
During the boom sellers would throw on a coat of paint or make superficial home improvements so they could demand top dollar for the property. Since the shift in the market I believe the opportunity is with the buyers. In the current market many of the properties for sale are bank owned or pre-foreclosure (short sales) properties. The condition of bank owned properties are usually worse. They are likely vacant and it is not uncommon to see these properties with the appliances and or kitchen cabinets having been removed. In addition they, like the pre-foreclosure properties, are likely to have deferred maintenance because the current or previous owners simply didn’t have the cash to take proper care of the property.
Whether the seller is a bank or a distressed seller, odds are they do not have the cash they would need to repair the property…Can you hear it?….
Knock…Knock….
Who’s there?
Opportunity!
In many cases the seller of the property, has a property that is in need of repair…it is not the most attractive property available…That translates into a lower price. Just in the month of January I have closed 5 loans with Renovation Financing:
| Purchase Price | Cost of Reno | Acquisition | Appraised Value | Equity | % Increase |
| $150,000 | $39,890 | $189,890 | $221,000 | $31,110 | 21% |
| $176,000 | $52,888 | $228,888 | $245,000 | $16,112 | 9% |
| $435,000 | $91,677 | $526,677 | $545,000 | $18,323 | 4% |
| $355,000 | $68,126 | $423,126 | $455,000 | $31,874 | 9% |
| $405,000 | $49,677 | $454,677 | $455,000 | $323 | 0% |
Clearly not all deals are the same but all but one generated a substantial amount of equity.
These gains are not projected, they are actual cost verse the after improved appraised value. If Forbes/Case Shiller’s predictions of value increases is accurate… by choosing a home in need of repair and using renovation financing you can increase your equity gains over the next 5 years. Every market presents opportunities. The most successful folks I know can identify the opportunities and take advantage of them.
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