November 2015

5 Questions to Ask Yourself Before Buying a Fixer-Upper Property

 

Remember that high school movie where the homely girl was transformed into the beautiful prom queen when she removed her glasses and put on some makeup?

(Yeah… me neither. I was watching Die Hard.)

The point is this: Human nature loves to see transformations. We love to see the before and after and marvel at what it must have taken to get from A to B. Just tune into any episode on HGTV to see what I’m talking about.

For this reason, people love to buy fixer-uppers. But is this always a good idea when investing in real estate? Should you invest in a fixer-upper when getting into rental properties? Let’s find out.

What Is a Fixer-Upper?

First, let’s all get on the same page as to what I’m even talking about when I use the term “fixer-upper.”

A fixer upper is a home that needs either minor or significant rehabilitation before it can be used for its intended purpose. This could refer to both a “house flip” or a “rental property,” but I’m mostly going to focus on the rental side. The repairs a fixer-upper can need range from light cosmetic work, such as fresh paint or new carpet, to more intensive renovations, such as a new roof, foundation, plumbing, or electrical.

I actually love investing in fixer-uppers. In fact, I’ve never purchased a property that didn’t require some level of rehab to get it to a rentable condition.

For me, it has just made sense.

On the 44th episode of the BiggerPockets Podcast, Michael Woodward tells a story about taking his kids to look at potential houses to buy. Michael mentions that when they walk into a house with an absolutely terrible odor, he turns and asks his kids, “Boys, what does that smell like?” In unison, they shout, “Money!”

What this cute story represents is often the truth with fixer-uppers: There can be money in the mending, riches in the restoration, freedom in the fixing!

At the same time, fixer-uppers do carry a large degree of risk and can turn your investment into a money pit. So let’s examine both the pros and cons of buying a fixer-upper.

(Click to read on BiggerPockets…)

 

(A special thanks to Keystone CPA for their help in making sure the information below is as correct as possible!) 

Taxes suck, don’t they?

Sure, they pay for our roads, our schools, our bank bailouts, and our welfare system… but they are kind of the pits.

But what if I told you there was a way to make them suck a little less?

Enter: The 1031 Exchange. To a lifelong real estate investor, this little trick might completely revolutionize your business and help you save on taxes AND build significantly more wealth. This post will be your road map to make this happen.

What is a 1031 Exchange?

If you decide to sell a rental property at some point, you will need to pay taxes on that gain.

Bummer.

Now, this might not be a big deal if you are a terrible investor or have had some bad luck and you don’t have any financial gain. But hopefully you are a smart real estate investor. You read BiggerPockets, after all. You aren’t going to make some measly profit or sell at a loss. You are going to rock this game and make some serious moolah when you sell! In short, you are going to have so much cash that you’ll need to get yourself some bigger pockets. (See what I did there!?)

But then Uncle Sam is gonna come a-knockin’ for his piece of the pie. And trust me, he’s got quite an appetite.

Don’t fret, though! I’ve got some good news: The IRS wants to partner with you on that money by allowing you to do a 1031 exchange.

Seriously? Partner? With the IRS? 

Yep. Through a 1031 exchange.

A 1031 exchange (pronounced “ten thirty-one exchange” if you are cool like me), is a tax strategy so named because of its inclusion in Section 1031 of the IRS tax code. It also commonly known as a “Starker exchange” or a “Like Kind exchange.” In essence, a 1031 exchange allows an investor to “defer” paying any property taxes on the property when it is sold, as long as another “like-kind” asset is purchased using the profit received. We’ll talk about exactly what that means in just a moment, but let’s cover the big picture first.

(click to continue reading on BiggerPockets)