Expert: Dick Dennis - 10/4/2005

Question
Hello I have been dealing with investment properties for almost a year now.  My first property that I bought was a two family property in the city of Fall River Massachusetts.  Now I purchased this property for 185,000 and then put 37,000 into it to fix it up (including mortgage payments). I later sold the property for 265,000.  Now after paying closing costs and Realtors, and moving costs and everything else I really did not do so well.  After that I purchased a three family home for 230,000.  Now I have put 100,000 into this property including all mortgage payments closing costs fixing it up everything.  (Also keep in mind that I live or lived in each house that I have bought.)   Recently the house was just appraised for 390,000.  Meaning there is 60,000 in equity in the home.  My question is how can I make some real money with real estate?  Because from what I am doing I'm not really making that much money.  I only make about thirty grand a year at my regular job.  How can I take my sixty grand in equity and turn it into something?  Thank you for your response in advance.

Answer
You're doing well, Michael, but you don't know it.

First of all, you must realize making mortgage payments IS NOT part of your expense. Why? Because you are paying yourself back with part of that mortgage payment.

If you want to make more money from your investments, then you need to remember something I learned a long time ago from a friend who was a very successful real estate broker and investor:

YOU DON'T MAKE YOUR MONEY WHEN YOU SELL THE PROPERTY. YOU MAKE IT WHEN YOU BUY IT.

That means you are paying too much for the properties you are buying. Further, you should not consider real estate as a quick-profit investment. If you are looking for a flip property, try to find one that you can wholesale to another investor. Let him spend the money fixing it up. Take a smaller profit for a quick turnover.

Otherwise, if you expect to fix up a property, after assessing the cost in advance, you should buy that property at a better price .  .  .  or move on to the next property until you find one you can make a decent return.

Otherwise, real estate will keep you in good stead your whole life even if you only buy one property every two years. Better yet, if you keep every one you buy! You don't need to sell. After you fix up a property, refi it. And use that money to buy another at a good price. Fix that up and refi that one and buy another one and on and on and on.

By the way, I noticed you did not mention another cost after selling a property—the IRS.

You also might look into buying a house, living in it for two years, fixing it up where necessary, then make your profit WITHOUT paying any capital gains taxes.

One last suggestion. Be very careful. We are heading for a leveling off or a down real estate market. So, even more so, you have to buy it right. In fact, you should find opportunities to buy properties at very good prices soon. You have been investing only when prices have continued to go up. When the market turns sour, investors are the first one to panic and run .  .  .  if you don't buy it right.

I wish you well.

Dick Dennis         dixiedee13@aol.com