5 Keys

To Increase Your Wealth in 2012

COACHING
5 Keys to Increase Your Wealth in 2012

5 Keys to Increase Your Wealth in 2012

While the pundits may differ on what the future of real estate holds, you can make 2012
one of your best investing years by simply understanding and practicing a few key prin-
ciples. Whether you are a seasoned investor or just starting out, applying the ideas dis-
cussed in this article can give you a distinct advantage this year and in the years to come.

Key #1 – Understand Your Market’s Economy

The real estate bubble “burst” over five years ago, but we’re still feeling its effects today.
While the Nation’s poor economic health has created problems we all share, local areas
also have their own economies. Understanding the local economy and how it influences
the real estate market is essential to your success.

What is the economic climate for the areas in which you are investing? For example, a
recent look at the seasonally adjusted unemployment rates for each of the states sees
a swing of more than 9%. In other words, while things are tough, they’re not tough all
over. What is the job market like in your area? Are people having a hard time making ends
meet and needing to find affordable housing? Or, have people weathered the storm and
are now ready to get back into home ownership?

From unemployment to the amount of foreclosure activity, the circumstances across the
country can be as different as night and day. Your job is to understand your market’s
economy in detail and conclude why it is what it is. Only by understanding the economy
in your market will you be able to understand why things are the way they are and have
a plan in place to capitalize on it.

Key #2 – Recognize Influencers

If Key #1 is looking back at what has happened and what is, then Key #2 is looking
forward and predicting what will be. Identifying influencers that affect your market posi-
tively or negatively coupled with your economic research can help you see opportunities
before others do.

While store closings have made the headlines in the past, the truth is many businesses
are poised to expand in 2012. New shopping centers can be extremely attractive to
home buyers. Finding these new developments is often as simple as taking a different
route to your regular destinations and taking note of what you see out the car window as
you drive by. If you see signs of land being cleared, surveying or the beginnings of con-
struction in and around major roadways, it is a pretty safe bet that a new influx is coming
into the community. Any changes designed to handle increased traffic flow can tip you
off to new developments, too. Widening traffic lanes and installing new traffic lights are
just a couple of telltale signs.

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5 Keys to Increase Your Wealth in 2012

Also, getting to know those who work in the road and building departments for your city
or county—or at the very least, attending city planning meetings —can make you aware
of significant projects being proposed or scheduled to begin.

Key #3 – Know What Realistic Pricing Is

Most real estate agents will tell you one of the biggest frustrations they face is people
thinking their home is worth more than it actually is. Perhaps it is people not wanting to
come to grips with the equity lost in the downturn or just being naive. Whatever the case
may be, it doesn’t matter. You need to know what a realistic price is for 2012. Not what
their home appraised at a few years ago, when they took out a second mortgage, but
what it is today.

As you begin, you’ll want to be sure that you are comparing “apples to apples.” In other
words, year built, square footage, number of bedrooms, lot size, etc. Should all be com-
parable. Take special note if home prices are accelerating faster in one area than in oth-
ers. What might be the cause for this? Is there anything from your research in Keys #1
or #2 that could provide a clue? Also, you will want to check the average home price in
neighboring communities to see whether it is higher or lower. Doing so will provide you
an idea of where the biggest demand is.

The more you study pricing, the quicker you’ll be able to recognize a bargain or when a
seller has lost touch with reality. Realtors and real estate agents are a terrific source for
pricing trends given their access to the Multiple Listing Service (MLS). Also, the Internet
and local newspapers can be helpful in your search.

Key #4 – Determine an After-Repair Value

All your efforts to determine a realistic price for your market will be for naught if you pay a
price that causes you to lose money once everything is said and done. You need to know
what a reasonable offer for the seller is while still allowing yourself to create an acceptable
return for your time and effort. This amount will be your Maximum Allowable Offer (MAO).
If the seller cannot meet you at or below the MAO, then the deal does not make sense
and you should walk away.

A simple formula to determine your MAO price is found below:

ARV (After Repair Value or market value)

x .7 (20% Profit and 10% for Closing & Holding Costs)
- RCE (Repair Cost Estimate)
= MAO (Maximum Allowable Offer to your seller)

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5 Keys to Increase Your Wealth in 2012

For example:

$100,000 (After Repair Value or market value)

x .7 (20% Profit and 10% for Closing & Holding Costs)
= $70,000

$70,000
- $5,000 (Repair Cost Estimate)
= $65,000 (Maximum Allowable Offer to your seller)

When you determine the MAO, make your offer 3% - 5% below that to give yourself
negotiating room. You never want to pay more than your MAO allows. The better your
negotiation skills—your work with Keys #1-3 will help here—the more money you stand
to make. However, don’t take advantage of the seller. Make sure they benefit from the
transaction too. Doing so will build good word-of-mouth and a positive reputation.

A good rule of thumb to estimate repairs on a property is:

Bad = $10 per square foot.

House needs cosmetic repairs; such as, kitchen or baths redone, floor-
ing, paint, fixtures replaced, minor electrical or plumbing, minor landscape
work.
Worse = $ 15 per square foot.
House needs all of the above repairs plus major heating and air
conditioning work or replacement, roof repair or replacement, major
interior repairs, such as, walls & ceilings.

Worst = $20 per square foot.

House needs all of the above repairs plus replacing windows, doors,
siding, foundation or structural issues, major wood rot, re-wire, re-
plumb, major landscaping. In older houses wiring may not be up to
code or may use the old screw-in fuses instead of modern circuit break-
ers. Plumbing may be cast iron instead of copper. Cast iron plumbing
will corrode over time and close itself off much like a blocked artery.

If the property is less than 900 square feet add 50% more to your repair estimate be-
cause there is a limit to how far repair costs will drop due to size.

Key #5 – Use Tax Benefits to Your Advantage

Over the last few years, the U.S. Government has gone to great lengths to help jump
start the economy. By changing the tax code, the Government incentivises people to
do what the Government thinks will help the economy grow. (We’ll save the debate on
how well these incentives work for the upcoming Presidential election.) Because of these

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5 Keys to Increase Your Wealth in 2012

incentives, real estate investing can create tremendous tax advantages. In fact, even be-
fore the downturn, several provisions of the U.S. tax code were written with the specific
purpose of encouraging real estate development and investing. Government legislators
know that America needs an ever-expanding supply of decent and affordable housing,
and that the government itself is poorly equipped to provide it.

You have to know how to play the game. You’ll need to hire a savvy tax accountant or
other real estate investment advisors. They will introduce you to the concepts and calcu-
lations that you need to know to begin asking the right questions.

The Bottom Line

As you can see, none of these keys are actually “new” in the truest sense of the word,
but each of them has and will take on new meaning as the economy turns itself around.
And even if it doesn’t, you now have an arsenal of tools that will help you be profitable
regardless of the ever-changing economy.

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