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.
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 20-30% 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 gain 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.
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”?
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 pay-down of debt. Personally, I love when my returns from investing pay down my debts for me.
So, what are your favorite strategies to maximize your real estate deals? Do you use any tax strategies or finance hacks?
Please share below!