Most real estate investors fall into one of two categories when it comes to an exit strategy and selling an investment property: buy-and-hold or house flippers. Buy-and-hold investors take a long-term approach to investing because they add the property to their investment portfolios. These individuals prefer to generate cash flow from rental income, realize tax benefits and, hopefully, profit from a rise in property value when they decide to sell.
House flippers purchase a home for a significant discount below market value with the intention of flipping the property for a predetermined profit within a few short months. RealtyTrac lists Atlanta at number 6 on its list of the 20 metropolitan areas with the deepest foreclosure discounts. But the rate of metro Atlanta foreclosures has been cut in half in the last 18 months.
Regardless of the investment approach, here are three considerations for investors who desire to achieve the highest profit margin when selling an investment property.
1. Renovation budget and value
One of the keys to gaining the highest profit margin when selling an investment property hinges on your ability to stick to a budget when making repairs before the resale. John Maddux specializes in flipping houses in the San Diego and Atlanta markets. He recommends to Reuters that investors spend up to 25 percent of the expected sales price on improvement and upgrades.
Investors receive maximum value and boost profit margins by putting their renovation dollars toward fresh paint jobs, garage doors, minor kitchen improvements and new flooring.
2. Take advantage of rising real estate prices
Technically, a flip is defined as any property that is sold again within one year. Usually, most investors complete these projects in a much shorter period of time. For example, according to RealtyTrac, in the first quarter (Q1) of 2013, flippers across the nation turned around projects an average of 79 days, and 92 days in Q4 2013.
Savvy flippers have adjusted their strategies to realize even higher profit margins by lengthening the renovation period to take advantage of the rise in the market value of homes. In the first quarter of 2014, RealtyTrac reports that the national average for turning around projects rose to 101 days.
3. Manage costs to protect profits
Real estate investors do what they can to minimize holding costs — mortgage payments, insurance, legal expenses, real estate fees and broker’s commission — which take a huge bite out of potential profits.
They may also incur a number of other expenses, including the following items:
- Local assessments
- Homeowner association fees
Consequently, investors must find ways to control costs to increase their profit margin. While sellers may not be able to make a big difference for fixed expenses, they can save a significant amount of money off real estate commissions by listing their properties with Duffy Real Estate. Under Duffy’s flat-fee listing, sellers pay $500.00 upfront plus 0.0034 of the sales price at closing, and also receive a full range of marketing services.
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