3 Ways to Make a Stellar Real Estate Deal Out of an Average One

3 Ways to Make a Stellar Real Estate Deal Out of an Average One

4 min read
Dave Van Horn

Dave Van Horn is a veteran real estate investor and CEO of PPR Note Co., a $150MM+ company managing funds that buy, sell, and hold residential mortgages nationwide. Dave’s expertise is derived from over 30 years of residential and commercial real estate experience as a licensed Realtor, real estate investor, and private lender.

Experience
Beginning his career in construction and as a Realtor, Dave bought his first investment property in 1989. After years of managing his own construction business, Dave became a full-time real estate investor, specializing in fix and flips, buy and holds, and eventually commercial projects, before moving into note investing in 2007.

Over the past decade, Dave has also invested his time into becoming a connector and educator, who helps others achieve success. He focuses jointly on helping accredited investors build and preserve wealth with his group Strategic Investor Alliance and with general audiences through the annual MidAtlantic Real Estate Investor Summit.

Dave has also shared his strategies and experiences with real estate and note investing via hundreds of articles published on the BiggerPockets Blog and with his acclaimed book Real Estate Note Investing.

Press
Dave has been featured on the BiggerPockets Podcast twice (shows 28 and 273), as well as episodes of familiar podcasts, including Joe Fairless’ Best Ever Show, Invest Like a Boss, Cashflow Ninja, and many others. He also has been a guest of Herb Cohen’s on Executive Leaders Radio, which airs nationwide.

Accreditations
Dave is a licensed Realtor with eXp Realty with CRS and GRI designations.

Follow
Dave’s LinkedIn
PPR on LinkedIn
PPR on Facebook
Twitter @DAVIDAVANHORN

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Early on in my real estate investing career, one of my goals was to buy one rental property a year. I used to dream about having them all paid off, free and clear, by retirement.

Keep in mind that this was at age 29, just after I passed my real estate exam and bought my first investment property. My theory was that since real estate agents don’t usually have much of a retirement plan, I could either cash flow off 20 houses or even sell one each year in retirement.

Then my goals quickly morphed. One year, I bought seven rental properties, followed by nine more properties the next year. At 40, I was well on my way to having over 100 units like many of my investor friends.

But then my dream changed again. I realized that by using creative financing to increase cash flow and by incorporating some tax and note strategies, I might not need to have that many units to have the lifestyle I wanted. Instead, I could improve the real estate deals I already owned, bringing them from good to great, while also adding new alternative investments to my portfolio.

Related: 4 Actionable Ways to Find Real Estate Deals, Even in a Red Hot Market

What’s an “Average” Deal?

When it comes to real estate investing, every deal is unique, but the “average” real estate deal varies based on your market.

For my friends and me living outside of Philly, the average deal was a 2- to 3-bedroom twin or row home that could rent for $750-$1,000 a month, and it usually cost well under $100K.

I know some of you are probably thinking, “There’s nothing like that around where I live.” But just hang in here with me.

master-lease-option

I’d pick up a 3-bedroom house for $40K-$45K, and after repairs and closing costs, I’d be all in at approximately $65K with an ARV (after repair value) of about $100K. If I sold that house for $100K, less real estate agent fees and transfers taxes, I would be at $93K, netting approximately $28K before taxes. Since it’s usually less than a year from start to finish, I might net approximately $19,600.

If I couldn’t sell it or didn’t want to, I’d go to the bank, and they’d give me a 20 to 30 percent down, 30-year mortgage, and I’d probably be glad to cash flow $300 a month (or maybe a little less on a 2-bedroom).

Deals like this one were common amongst real estate investors in my area. We also purposely didn’t keep big properties due to increased maintenance costs, and we preferred those that were easy to rent.

3 Ways to Improve Your Real Estate Deal

You’re probably wondering how you can take an average deal and tweak it to make it better. It’s easy. Try to save money on taxes wherever possible, find the highest and best use of that property at that time, and utilize the best financing available, either through terms or the proper use of equity to increase cash flow. Now, I know; I just said a lot. Let’s break it down.

1. Save on taxes whenever possible.

For real estate investors, the biggest hit usually comes in the form of a capital gains tax when selling a property. One of the simplest strategies to avoid the more expensive, short-term capital gains tax is to wait a year and a day before selling. At that point, it would be considered a long-term capital gain, which is usually subject to a lower tax rate.

There are three other strategies that come to mind, all of which may help to reduce the amount of taxable gains from the sale.

  • One is a strategy my friend Mark Halpern uses all the time, and that’s selling on a lease-option.
  • The second strategy for those of us with sizable portfolios is to keep the recently acquired property that’s just been renovated and sell an older property from your portfolio, maybe one with a bigger gain and less depreciation deductions left. There’s no harm in juggling your inventory every once in a while.
  • My third strategy is to possibly sell with owner financing (and with a nice down payment), and then maybe sell a partial of the note to try to recoup the rest of your capital.

Related: This Simple Advice From Warren Buffet Guides Me to Deals No One Else is Finding

2. Pursue your property’s highest and best use.

Pursuing the highest and best use of a property could mean a range of things.

Personally, I’ve done everything from adding two bedrooms in the third-floor attic to putting a new kitchen in the old dining room and adding a first-floor bedroom where the smaller obsolete kitchen used to be. I’ve rented the garage in the alley to a third party, and I’ve even built more garages to increase property value and cash flow.

What can you do with the property to get the most “bang for your buck”?

Attractive man in eyeglasses and charming woman is pointing at the laptop screen, laughing together, resting at cafe with cup of coffee.

3. Think outside-the-box with financing.

Another way to improve the profitability of your deal is to get creative with financing.

This can be anything from taking out a longer-term loan (i.e., 10-year fixed, interest-only mortgage to jack up cash flow) to utilizing the equity in your property through a HELOC (home equity line of credit) to lend as private money to another rehabber. The latter is a form of arbitrage, which would allow you to make additional money on the spread.

Another strategy would be to accelerate the paydown of debt. Personally, I love when my returns from investing pay down my debts for me.

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So, what are your favorite strategies to maximize your real estate deals? Do you use any tax strategies or finance hacks?

Please share below!