Profits in Buying & Renovating Homes
Table of Contents |
Remodeling for Profit
There are probably as many ways to
make money in real estate as there are people in the business. It's an
enormous field, with many occupations and hundreds of specialties. All
offer opportunities for those who know how to take advantage of them.
Your local library probably has a
shelf of books on the subject. Some are good, some aren't. Many emphasize
the financial side of real estate: making complicated deals to buy low and
sell high, without doing any improvement work on the property. That isn't
how to make a living in this business.
So what could I possibly offer
that's new, that you haven't heard before?
I'll tell you. I'm an
investor/remodeler. Notice that "investor" comes first. I'm in the
business of making money from homes that I buy, fix up, and sell. Not just
any home, not just any fix up, and not just any sale, mind you. It has to
be done exactly right to make the right kind of money. And I do make
money, plenty of it. I have to, it's my job. It's all I do. If I don't
make money on my sales, I don't eat.
If you're interested in remodeling
homes that you've bought for resale, this book is for you. My approach is
simple, it works, it's low-risk, and it pays well. It's even fun - most of
I'm going to explain in detail,
exactly how I make a good living in this business. I've learned a few
things in the last 12 years. I've made some mistakes, taken a few wrong
turns and stumbled more than once. But I've got most of the kinks out now
and I see opportunities almost everywhere, in every part of the country,
in hundreds, maybe thousands of communities.
What I do isn't unique. I think
almost anyone could do it. Of course, it helps to know something about
building and construction trades. I worked as a tradesman before quitting
to do the work I do now. But if you’ve got some background in
construction, a little cash, and are willing to get your hands dirty, this
may be a good-paying career for you. On the chance that I’m right, I hope
you’ll stick with me long enough to consider my approach.
My Approach to Remodeling
Residential remodeling is very
big. The home remodeling business is an enormous industry - not quite as
big as new home construction, but much more steady and growing much
faster. Many communities are passing no growth or slow growth initiatives
to limit new housing. This is bad news for new home builders, but great
for remodelers. These initiatives will force people to buy older homes and
remodel them, and builders to look carefully at remodeling for their
future. As the housing stock in this country grows older, the remodeling
industry will grow with it. I'm told that in Europe, home remodeling is a
much bigger industry than new home construction. We may see the same thing
happen here during your lifetime.
Most homes are remodeled either by
professional builders working for the owner, or by an owner who has the
time and talent to do the work. Both the talented amateur and the
professional remodeler have the same goal in mind - creating the nicest
home possible for the owners' use. And there's nothing wrong with that -
an owner with the desire and money to pay deserves as much.
If you're like most people, you're
willing to spend more when it's you that gets the benefit. You want to
please yourself and your family. The little extras in your life are worth
the cost. "Who cares if the sink costs $2,000," you say. "It's exactly the
one my wife wants."
My approach is different. As I
said, I'm an investor/remodeler. My focus is minimizing the inputs
to maximize the output. I've discovered that doing more work doesn't
guarantee that I'll make more money. On each home I fix up, there's a
point beyond which the cost of additional work can't be recovered on sale.
Knowing how much to spend and where to spend it is one of the secrets I’m
going to share with you.
Knowing what I know makes me less
work-oriented than most remodelers, whether professional or amateur. It
also affects the focus of this book. Most of the remodeling books I’ve
seen approach the subject from the point of view of the work to be done.
The authors assume that you have to work more to make more money or make
the home more attractive and functional. The harder you work, the better
you’ve done. That isn’t what I’ve learned.
My Teacher Is Experience
Another reason you may want to try
my approach is that I'm writing from experience. Many books are written by
people who don't actually do the work they write about. They just like to
talk about it, or maybe they just like to write books. They sit at their
word-processing terminals and write about the way they figure it ought to
be, or the way they imagine it is. There's little first-hand information
in books like that. It' s possible to write a book from what you learn in
books or magazines. I haven't done that.
What you find between the covers
of this book is all original and all based on my own experience. With very
few exceptions, I'm only going to tell you what works for me - and
sometimes about what didn't work for me. I'm not going to recommend
anything unless I've tried it and know it works. And for good reason. Even
some of my best ideas turned out to be flops.
There are a couple of exceptions
that I couldn't resist. But I'll clearly identify them as possibilities
you might want to consider - not what I'm recommending.
Buying, Remodeling, and
Buying, remodeling, and selling
homes is a big subject. To help you understand all the details, I'll go
through the entire process with you step-by-step. We'll cover each subject
in logical order, the same order you'll follow when you try it.
The first subject we'll cover is
how to select the right property. This is probably the most important part
of the entire process. I'll suggest a procedure for evaluating the
properties available and the criteria you'll use when making the final
Then we'll go into financing. How
are you going to pay for the property? This can be a real problem. Many
people who would like to buy and remodel houses can't because they don't
have enough cash. I'll suggest some available options if your cash is
Once you have the property, what
should you fix and how should you fix it? I’ll go through most of the
common repair problems you can expect to run into, and suggest some good
ways to deal with them.
What about improvements? How can
you bring your run-down, out-of-date house up to the standards we've come
to expect in a modem home? Improvements can be very expensive. Some are
worthwhile and some are a waste of money. I’ll help you decide which is
Nobody likes an ugly house! How
can you make your house beautiful and desirable, so it brings top dollar,
and yet not spend a fortune doing it? I'll explain inexpensive ways to
turn a sow's ear into a silk purse.
We'll finish up with a section on
selling your house. You won't get your profit until you find a buyer. I’ll
go into the options available to you for finding one, and closing the
Now that you know what's ahead,
let's get started. I hope you're ready to charge into the world of real
estate and find that diamond in the rough just waiting for you to come
Pick Your Specialty
I believe the surest way to make
money in real estate is to pick one type of property and specialize in it.
There isn't one real estate industry in America. There's a million of
them, one in each neighborhood and within neighborhoods, one for each type
of home. It's impossible to know about every kind of property available on
the market in every community. There are just too many. My specialty is
single-family homes located near the community where I live. I don't do
commercial property, I don't do multi-family, and I don't do construction
contracting. I work in big-city suburbs, not small towns or resort areas.
I've chosen my specialty for
several reasons, which I’ll discuss a little later. I concentrate on
single-family homes in a limited area. I've come to know my market. I know
what buyers want in their homes. I know the best price range for maximum
resale value. I know which streets and what neighborhoods are a good
choice and which are a bad choice. I don't experiment with different types
of property. I'd rather do a good job in a limited area with a certain
type of home than run the risk of getting wiped out in unfamiliar
Many people, especially
tradespeople, ask me why I buy the homes I remodel. Why risk my own money?
Why take on the aggravation of being totally responsible for a major
project? Is it really worth it?
My answer is a resounding "YES!"
and for a number of reasons. I’ll explain them one at a time.
First of all, as you might guess,
there's good money to be made from buying and remodeling homes. Doing most
of your own work compounds your profits. I'll explain.
You probably know of at least one
investor who buys houses and hires contractors to remodel them. The
contractors hire tradesmen to do the actual work. The tradesmen are paid a
wage for their time, the contractor earns a share for his part of the job,
and the investor makes a profit on the sale of the house, less expenses.
If investor/remodelers are active
in your community, most are working this way. Many real estate investors
make a good living like this. If you don't have the time and don't know
anything about construction, maybe that's all you can do. Projects are
being done this way every day and in every part of the country. I guess
that proves there's plenty of profit in it.
William Nickerson, the famous
author of real-estate books, suggests exactly this approach. He hires
everything out. His book, How I Turned $1,000 into $1,000,000 in Real
Estate, is a classic. The information in the book is as valuable today
as it was when it was written in 1959. It's one of the few real-estate
books that I recommend.
But what if you do some or most of
the work yourself? If you buy the house, you're the investor. If you
organize the work, you're the contractor. If you do some or all the work
yourself, you're the tradesman. Therefore, you're entitled to the wages
paid to the contractor and the tradesman, as well as the investor's
profit. You're paid triple for every hour of work you put in on your
project! Figure 1-1 shows the difference in profit margin between an
investor and an investor/remodeler.
I've said that there's good money
to be made in this business. So why don't I hire tradesmen to do all the
work? Here's my answer: Absentee investor/remodelers lose control. They
aren't there to make the thousands of decisions that are required for
every job. They pay too much for supervision, for materials and for labor
when they rely on someone else to do the work for them. My advice is to do
what you can and what you enjoy. You’ll end up putting far more profit in
If you're a contractor or a
tradesman, you'll have slow periods. There won't be enough work to keep
you busy. If you've ever watched your bills pile up while you wait for
work that doesn't come in, you know what an uneasy feeling that is.
Remodeling your own houses can put an end to that feeling. You create your
own job and you're your own boss. You can plan your work to stay busy for
weeks or even months at a time.
What if you're too busy to have
time for your project? No problem. Your own house can wait a week or so.
Of course, it isn't a good idea to leave it unfinished for too long. After
all, you have monthly payments. But a week lost now or then won't make
This flexibility is important,
especially if you work at another job. You can buy and remodel homes at
your convenience. If the work load varies during the year at your regular
job, plan work on your remodeling project when you have time. You control
the work. The work doesn't control you.
Another way to guarantee a steady
income from your investments is to plan on renting out some of your
completed houses. If you've selected a good property, the monthly mortgage
payment and expenses will be less than the potential rent on the property.
Rent it instead of selling. This can benefit you in several ways. You'll
have a steady flow of money coming in every month, year after year, and
rental property offers you a good tax break. Believe me, it isn't
difficult to accumulate enough rental income to cover all your basic
That's exactly what I do. My
rental property provides the income I need to cover my monthly bills. I
use the profits from the properties I fix up and sell for spending money
and new investments. Even if I don't do any work one month, my expenses
are paid and I'll still be able to eat. When you're self-employed you
don't get sick days, vacation days, unemployment compensation, or any of
the other fringe benefits that make life more secure. However, rental
income goes a long way towards solving that problem. If you don't work
you'll make less money, but you won't starve.
Work When You Want To
Here's another advantage you have
as an investor/remodeler. You get in, do your work and get out. You buy a
house, fix it up, sell it, and then you're done. If you want, you can then
go on and buy another property; or you can take some time off for a
vacation; or you can go back to your regular job. It's your choice.
Buying and remodeling houses isn't
a continuing commitment. You're only committed to one house at a time. It
gives you a more flexible work schedule than anyone working for wages.
Be Your Own Boss
If you're a remodeling contractor,
you're already your own boss, at least in a sense. Of course, you work for
yourself. But in fact, your customers are your boss. They determine when
you work, and how you work, and what has to be done over. Let's face it,
you won't be in business very long if you don't do what your customers
want. Unfortunately, some customers can be very difficult - nit-picking,
unreasonable, and fault-finding. You know what I mean. They can take all
the fun out of your work.
When you're remodeling your own
property, you're the customer. You can do anything you want, and do it
your way. You don't have to justify your costs, or have your best ideas
rejected, or good work ruined by someone else's whims. What you want is
what you get. You're responsible only to the future buyer. And you may not
meet that buyer until the project is finished. For me, this alone makes
buying and remodeling houses worthwhile.
Of course, sooner or later you're
going to have to deal with customers. That is, if you want to sell the
house. But all your customers ever see is the finished product. They won't
know what the house looked like before you started or how you managed to
make it as nice as it is. Better yet, they won't care. You're offering
them a good house for a good price. They're happy, and you're happy.
You're making a good profit.
If you're a tradesmen or handyman, you may never have been your own boss
before. It's a rewarding experience. I spent several years of my life
working for other people. I know what it's like to do seemingly pointless
tasks because someone higher up has a crazy idea. I also know what it's
like to have valuable, creative projects rejected. Well, as your own boss,
you don't ever have to put up with that.
Sure, being the boss can be a
headache at times. You have the final responsibility for everything, and
sometimes it won't be pleasant. If there's a job that's so nasty and
disgusting that I can't even pay someone else to do it, guess who
gets stuck with it? And if I don't make as much on a project as I
expected, there's no one to blame except myself. However, just being able
to say, "We're going to do it my way, because I'm the boss," makes it all
worthwhile. Maybe you feel the same way.
Owners Have Privileges
While the building code and zoning
ordinances vary from city to city , property owners have less restrictions
than hired contractors. Most laws, after all, are made to protect the
property owners. You only have to worry about the codes which will protect
you from yourself!
As an owner, you won't need a
contractor's license to work on your own property . You will need to get
permits for major work, and your work will still have to pass
inspection. But many cities issue "owner permits," which are usually very
easy to get. A lot of the work you'll be doing may not involve any
paperwork at all! As a contractor, you' d need a briefcase full of plans
and permits to do any work at all.
Many cities require general
contractors to use subcontracts for trades like plumbing and electrical
work. But many of those same cities will issue you an "owner permit" to do
the work yourself. That can save you a lot of money. Of course, you' d
better know what you're doing (for your own safety, and to pass
inspection). Subcontract anything that's over your head. You're not going
to lose anything. You'd have had to do that as a contractor anyway.
Another advantage to being both
the boss and the owner is that you can organize the work to suit yourself.
For instance, you can hire out jobs you don't particularly like, and just
do what you enjoy (most of the time). You can do the work in any order you
like, although you have to be practical. Some jobs have to be done before
others. You wouldn't want to lay carpet before painting, for example. But
in most cases you can do what you want, when you want and the way you
Many tax advantages are available
to investor/remodelers. Although the 1986 Tax Reform Act eliminated some
of them, enough remain to make buying and remodeling homes worthwhile. In
fact, since the Tax Reform Act eliminated so many deductions in other
areas, my line of work may actually have come out better by comparison.
The profits you make from buying
and reselling houses are now taxed as ordinary income, but all your
job-related expenses are deductible. This includes mileage and gasoline
for the time you spent driving around looking at property; your closing
costs, mortgage interest and property taxes; and the cost of the tools and
supplies used to fix up the property. Your accountant can probably suggest
other deductions you're legally entitled to claim.
You'll probably pay less tax on
profits from the sale of a house than you would on equivalent income as an
employee. See Figure 1-2.
The tax benefits are even better
with rental property. If you rent a house out, your profit is distributed
over many years. If you're on the, border of a higher tax bracket, this
can be very helpful. Even more helpful is your depreciation allowance on
the property. You can deduct a percentage of the cost of your property as
depreciation, even if the property's value is going up!
The maximum allowable depreciation
on rental property at the time of this writing is roughly 3.4 percent per
year. The cost of the building can be depreciated over no less than 29.5
years. But I have properties that are increasing in value about 20 percent
a year. Yet I can still depreciate them by 3.4 percent a year! You won't
be taxed on the appreciation (which is your profit) until you sell the
property. That's a good deal. Not as good as it was before the Tax Reform
Act, but still good. With rental property you can make a very good income
year after year and pay little or no tax at all! You get to keep your
money, instead of giving it all to Uncle Sam. There are very few
businesses where you can do that . . . legally. I'll go over this in much
greater detail in the section on "Rental."
I hope by this time you're
beginning to see the possibilities. The purpose of this chapter is to whet
your appetite for more. And, of course, there's plenty more - more to
learn, more opportunities to recognize, and more pitfalls to avoid.
If you're ready to dive in and
begin at the beginning, go on to Chapter 2.
Table of Contents |
Paperback, 304 pages
Profits in Buying & Renovating Homes