For those who haven’t lost their own homes, real estate is beginning to look like a good investment once again. Investing in houses sure lost its luster over the past year, but people who still have capital to put somewhere and are tired of two percent interest rates at the banks are beginning to look at the vast swathes of empty, and likely undervalued, properties out there. They see potential which is a good sign, given the negative cloud that we’ve lived under for the past year. However, like anything that seems â€too good to be true,†one must exercise caution and common sense before plunging back into the real estate market. One of the most attractive options out there right now are the empty houses that banks have foreclosed on, then left vacant. They haven’t sold and many of these have subsequently been neglected or even vandalized, reducing their value even further. There is significant potential to make a profit by buying and rehabbing these rundown properties, then reselling them. The initial investment has never been lower. In some cases you can buy a relatively intact home for ten or even twenty-thousand dollars (there are certainly cheaper ones out there, but many of these are precariously close to requiring demolition). The key, before making the purchase, is to determine two factors: # How much will it cost you to make the home habitable again? # How much money could you reasonably expect to sell the home for once it’s rehabbed? These two factors and their relationship to one another are critical to the investment equation. For example, if you buy a dilapidated home for $10,000 and it will take a further $20,000 to make it habitable, but owner occupied homes of similar style in the neighborhood are currently selling for $25,000; you don’t want any part of this house. $10,000 + $20,000 - $25,000 = a loss of five thousand dollars! The key is to find a neglected home in an area that hasn’t become totally rundown because if the neighborhood is being abandoned en masse, or if the properties are predominantly rentals, the odds of you selling a habitable house at a profit are slim. When putting together your estimates always err on the side of guessing too high when it comes to your renovation costs and go the other direction when estimating resale value. This leaves you a cushion in case things don’t go exactly as planned (and let’s face it, they seldom do). If you still have room to clear a decent profit after working those numbers, you may have found an opportunity.
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