I had a really interesting conversation with a younger guy who I would guess to be in his late 20’s the other day. We talked about a lot of different Costa Mesa real estate topics because he is considering buying his first home, and he was juggling the pros and cons of renting vs. buying, and wanted to know how to make money with your house.
We ran through all the obvious advantages of buying now – low interest rates, tax deductible mortgage interest, being able to control your payments (without rent rising), creating equity, and potentially not having to move again.
I totally paused – hmmm, great question. I have owned three homes, and I have used the equity gain over time in each home to be able to move into a nicer home and better neighborhoods. Then I thought back to the homes that I have owned, and what I would have done differently if I was in his shoes.
And here’s what I told him, and mind you this takes a bit of time and work, but I think this is one of the best ways to create true wealth in real estate. I told him to buy an inexpensive home, preferably a three bedroom home with 2 bathrooms. A 2 bedroom is ok but a bit more limiting down the line. I say a 3 bed/2 bath to start with because it will be a lot easier to rent or sell someday in the future. When you buy this home, try to buy the home that is cosmetically challenged – that is to say it is in reasonably good physical condition, but just needs a surface makeover on walls, floors, countertops and rooms, i.e. it looks like grandma’s house!
I would move into the home, and create a plan to clean it up room by room. Always start on the inside and work your way out with your remodeling, because you will be using the inside of the home much much more than you do the exterior. Start with flooring if you already know you won’t be touching the rooms – add carpet or hardwood (or tile that looks like wood) to the bedrooms, and paint the bedrooms. Add designer appropriate crown and base moulding to those rooms to give it that high end feel. That will make the home feel more like your own to start with- a bit fresher to start with. Add canned or recessed lighting where needed and important… it is not too expensive, but something that is important for now and later. Now on to the real projects- you have to pick what comes next. What will help you the most as you live there- a bathroom remodel? A kitchen remodel? It’s your choice, but in my experience you will need to do both to get the most out of this first home. The kitchen and baths are also important – do them in today’s tastes, but don’t make them too modern or too traditional. Opt for a blended hybrid approach that will make it look contemporary to today’s tastes, but not so design specific so that it will alienate a potential buyer down the road.
Once you have done the kitchens and a bath, you can move on to the outside. Be sure the roof is sound- that is your primary protection to the elements. Once that is good, be sure that the siding or stucco is in good shape. Adding siding or board and bat to a typical 3 bedroom home can significantly pick up the look of a home, especially one that might have some age to it. Now on to the landscaping – concrete is expensive. But it is one of the best elements of hardscaping that you can add to a landscape. Creating curved edges or paths can completely soften the look and feel of the exterior. Now add plants that create depth and soften the look of the landscape. I will leave it up to you weather you prefer grass or not- drought tolerant zero-scales are becoming popular now.
That’s it for your remodeling! Notice I omitted a few things in this list- I only said to remodel one bathroom, I did not have you remodel garages, or add patios to the backyard, or add fire pits, or any kind of high end luxury type of upgrades. Why? The goal is to create equity with adding as little as possible. You want to make this house look as good as possible so that you can sell it to the next person. Most people do not have the vision to see what a house really can be- they only see other’s stuff and belongings. You want to make everything look perfect, because that is what people will pay top dollar for in today’s HGTV world. They will overlook some things (like a non-remodeled bathroom, patio, etc) because they will typically like to put a little of their own stamp on these kinds of homes.
What can you expect to make in profit? Buying the typical $500,000 home in a good location in Costa Mesa would allow you to sell for around $700k at the time of this writing. That should should create at least a $100,000 equity gain in this first home, and if you sell the home two years after living there the entire gain is tax free. This is still Uncle Sam’s best tax free part of the taxation code in the US! As a single person, you are exempt up to $250k and married couples are exempt up to $500k so long as you have lived their as your primary residence for 2 years.
Now what? Same plan, only find just a little bit better home and do it again. Two to three years later, do it again, and a few more years down the road, do it again. Do you get it? As I said it takes a bit of time and a bit of work, but you will be able to move across better and better neighborhoods while creating real estate equity and wealth.
It is critical you have a Realtor partner in this strategy. You will need to know what the exact before and after comps are so that you can put this strategy into play. You will need a neighborhood that can support these kinds of moves too- you can’t necessarily do it in smaller neighborhoods where the comps aren’t there. This is how real estate investors work – they see the before and after potential and consider the upside of the investment.
Author Colin Delaney can be reached on his cell at 714-743-9882, or you can email him on how to put your real estate wealth budding plan together today!