A Secret to Real Estate Profits…Follow The Builder
As the real estate market cools, the profit potential of home ownership has cooled as well. Here is a strategy called follow the builder.
It is relatively easy to make a profit when you sell your home if the market is rising sharply like it has been in most of the country for the last two years. It becomes more difficult when a hot market slows down. It’s very difficult to make a profit on the sale of your home when prices are falling.
Is there a way to be relatively sure you’ll make a profit when you sell your home? There is a way to negate all even the most negative market conditions. In fact, I’ve seen young, energetic couples use this maneuver multiple times when they don’t even need to move.
In many areas of the country, there are builders who build hundreds of houses each year within a fifty mile radius of each other. They build entire communities or are one of three to five builders who build entire communities around big employment centers. This present you with an important opportunity.
Builders will typically sell first phases of communities for significantly less than later phases. On one hand, they need to get the cash flow moving. On the other, it is harder to sell at high prices because the community typically consists of dirt lots and construction equipment. Put the hands together and you have a great profit opportunity.
The idea is to get in on the first phase of the build out. You will purchase the home at a discount, which gives you built in equity. As the community is built up, you sell the home for a profit at a higher price. While youíre doing this, you keep tabs on the builders projects and find another location where you can do the same thing.
You’ll end up living in each house for a year or more and picking up nice profits along the way. The only real downside is you have to move repeatedly.
I’ve seen this work well for a number of people who have done it more than once. However, you need to be aware that generating profit this way can have tax consequences. You need to discuss your plans (including projected timing and profit potential) with your tax professional so that you are prepared to deal with any tax consequences.
However, if you don’t buy the properties in the new communities as your primary residence and use it as a buy and hold investment (rentals), you will limit your tax liabilities and potential harsh consequences.