You Make Money When You Buy—Not When You Sell
Here’s the bottom line: while you may actually receive the profits from your house when you sell, the amount of those profits is largely determined by which house you bought and how much you paid. If you make poor decisions when you buy the house, you won’t make money when the time comes to sell the house. It’s that simple.
You’ve probably heard that location is everything in real estate. It’s true, and if you buy well, you’ll sell well. This truism is the cornerstone of real estate investment strategy; here’s why. In less desirable locations, homes are cheaper, and so-called good deals are easier to find. Less desirable locations are often in areas of older and smaller homes, and buying a home there will involve higher upkeep costs and lower appreciation. In other words, the years of mortgage payments and the cost of upkeep will yield less return on your investment when you sell.
The two important keys to remember are, the better the location, the more you can improve both the house and its value. If the overall real estate market heats up, better areas appreciate more. In less desirable areas, you won’t be able to get back your investment on anything other than basic improvements, unless you buy at extremely cheap levels.
For example, thoughout Intown Atlanta and City of Decatur you'll find smaller 1300 to 1600 square-foot homes built in the 1930s, 1940s and 1950s. If those homes are in a desirable public school district, near a neighborhood business district, or other desirable location, their value has soared over the last 15 years (think small 3 bedroom 2 bath cottage in Oakhurst). Yet these same types of homes built near an airport or less desirable schools will sell for hundreds of thousands less and will be harder to sell.
Back in 2010, a lovely client of ours - Mike and Stephanie - found a small, 1450 square foot, three-bedroom brick cottage walkable to neighborhood restaurants and in a very desirable public school district in City of Decatur. The house was a short sale and was cosmetically out of date, but they got a good deal on it and were excited at the potential.
Looking at other homes in the neighborhood, Mike and Stephanie had noticed most had already been remodeled, upgraded or totally rebuilt (Actually, their home was the least attractive on the street.) It was a great opportunity, and they took advantage of it by painting, restoring the woodwork, and upgrading the kitchen, furnace, and wiring. And now, just a few years later, as they've outgrown the house, they had accumulated enough equity to put a sizable down payment on their next home.
Mike and Stephanie bought well—which would allow them to sell well.
First, they focused on the location. They looked for a neighborhood likely to go up in value, in a desirable school district and "walkable" to local shops and dining. At thte time they knew it was an area that would appeal to younger professionals who didn’t like a long commutes, where homes had charm, and where similar-minded homebuyers were moving in and renovating.
Second, they were careful about the money they put into the home. A large percentage of their upgrading required their own labor and cosmetic repairs. The money they did spend went where it would give them the best return: a new furnace, roof, and kitchen.
Third, they realized that eventually the house would be too small and they would have to sell and move to a bigger home. Their plan was to accumulate as much equity as possible, and they kept their eye on what homes were selling for in the area. They made money when they sold—but only because they made a smart buying decision. In fact, they made money precisely because of how they bought—not because of how they sold.
Because you make money when you buy -- not when you sell.
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