This is an excerpt from Todd's book Live Free - The Art of The Two Year House Flip which can be purchased here.

 

Chapter 2

To approach the home buying process as an investor, you must eliminate as much of the emotion that usually drives the purchase decision as possible.  It is wild to think that one of the largest buying decisions in most people’s lives is made based mostly on “warm and fuzzy feelings” and visions of holiday parties, but studies show overwhelmingly that this is typically the case.  You must learn to look at a home as a source of value, as opposed to a showpiece for friends and family. Since you are going to live in the home during a two-year flip, you will not sacrifice happiness for profit. There will most definitely be sacrifices that will need to be made, but regardless of how much profit a house generates upon a sale, a young couple with two babies and a Labrador probably shouldn’t try to fit into a one-bedroom condo—even if it is selling at 25 percent under market value. 

Never buy a home with the exception in mind, always abide by the rule.  This means that if 360 days each year the only people that will be in your home are your spouse, your two kids and you, buying a five-bedroom home is foolish.  Even if it would mean that Grandma and Grandpa will have their own room every other Christmas when they come for a few days, it is not wise.  Having guests over is the exception and everyday life is the rule.  Be flexible for the handful of times that you will have parties or guests spending the night; do not allow additional expenses or burdens.   

Now that you have tempered your expectations a bit and understand how to approach the buying process, what are you buying and where?

There are entire books written on this subject alone, but let me simplify the science for you by providing a few rules to live by when looking for your next two-year investment home.

• Buy an average size or smaller home based on bedrooms, bathrooms and square footage for your area.

• Do not buy a home in an area where developers plan to build for more than another year.

• Always buy a home that feeds into desirable schools. Even if you don’t have children or school-aged children, many other home buyers do.

• Do not buy a home that has been entirely updated or renovated. There won’t be much opportunity for increased value left for you.

• Get a full home inspection by a licensed home inspector every single time you buy a house. No exceptions!

• Do not buy a house with a strange floor plan that cannot be changed.  This will drastically reduce your chances of selling for a good price.                   

• Buy a house on a quiet, safe street. Really busy streets hurt the value of homes and worry buyers with small children.

• Do not buy a house in an area with little or no turnover.

• Buy a house with a backyard. The absence of a backyard eliminates most buyers with children or pets. 

A perfect home for a two-year investment is a three-bedroom house with two bathrooms and an attached two-car garage.  Contrary to popular belief, the home absolutely must need some improvement, such as carpet, paint, kitchen/bathroom updating, landscaping and possibly roofing work.  Ideally, the home would be in an area with desirable schools, recreational areas, restaurants, shopping and be a reasonable distance from dense employment areas.

Have your REALTOR® determine the turnover rate for the area. Turnover simply means the percentages of homes in the area that sell every year.  An area with a turnover rate between 10 percent and 20 percent is a great place to live and invest.  Also, have your agent determine the average price per square foot for homes in the area and base your purchase price on these numbers.  There is no specific formula for what to pay for a home as there are so many variables involved in a home’s value. 

The goal for a two-year investment is to find a home that you can purchase at least five percent under the average market value, and within a two-year time frame, create an additional 20 percent in equity through strategic improvements. 

You’ll hope to sell right at the average market value in two years, which will be determined by the price that home buyers are willing to pay for similar homes in the same market at that time.  You can get a reasonable estimate by having your REALTOR® use current data for homes that will be comparable to the home you are considering after you complete all of the necessary repairs and updates. Make no assumptions about the property value appreciating in addition to the value increase that comes from the updates you make.  Any market value increases will be a bonus.

 

Todd Tramonte

The Todd Tramonte Home Selling Team