Using Real Estate as a Tool
Dylan Dallaire - Director of Mentorship of the Real Estate Student Association
Whether you are an Art, English, Science, Law, Psychology, Engineering, or Business major you need real estate. Although you have other needs like food and clothing, real estate is a need that can be used and adapted to generate money. In other words, you can leverage the power of your own home as a tool to create an income. Although many people view buying a home as one of life’s greatest investments, how many people view this investment with an actual return? As a result, the point of this article is to provoke and inspire the thought of real estate as not an item, but a tool to create wealth.
Speaking of wealth, did you know that over the last 2 decades 90% of the people who became millionaires did so through real estate? Evidently, this large proportion of individuals indicates that there are proven methods and systems to create a significant income from the basic need of shelter. It may seem arbitrary of how so many people can make so much money through real estate, but there are fundamental methods of real estate that make this possible. I will discuss these fundamental methods of how money can be made through your home and what steps you should consider following.
Remember: anyone can do this because everyone needs real estate.
What it is:
Renovating is the process in which a building is restored to a value maximizing level. This often involves restoring the less desirable features of the home for the most desirable ones, such as replacing old flooring.
Why it matters:
Renovating a house should make it more desirable, which in turn, can increase the price of your home. Furthermore, buyers are often willing to pay more than the cost of the renovations in order to move into a “nicer” home. Let me explain.
I remember during the topic of negotiations in my OBHR 317 class at the University of Calgary we had to pair up and negotiate the sale of a house. In my situation I was acting as the seller and my partner was acting as the buyer. During this negotiation we came upon the topic of painting the house (which it desperately needed). I asked my partner, “how much more would you be willing to pay if I painted the house for you?” She replied, “$10,000.” What my partner did not know is that I could get the house painted for only $2000 (according to the exercise guidelines). That was an extra $8000 that I was able to walk away from our deal with for making a phone call to my painter. So why is there such a large price gap between her desired price and my actual cost?
My partner used her intuition to make an offer because she desired moving into a house with fewer problems. She is willing to pay more to get it done before she moves in. This emphasizes that buying a house is largely an emotional decision. That is, buyers may be willing to pay more for a “nicer” or updated home in order to avoid any problems after moving in. After all, the process of buying a house can be stressful in itself, so reducing stress where possible (i.e. fewer cosmetic problems) can be very desirable for a buyer.
Therefore, profiting from a renovated house comes down to the difference between the buyers perceived value of an updated home and your actual cost of buying and renovating the home. As a result, finding the area or houses in your market that has the largest gap between these values have the most opportunity to create an income. Yet, there are still some very important factors to consider.
What to consider:
I am sure you have seen or heard of TV shows like flip or flop and property brothers. Often, these shows portray their hosts turning a run-down home into the most beautiful house on the block while selling it for a profit. Although these shows are very educational as to how a renovating process works, they should not be used as an exact guide. This is because renovating a home to a value maximizing level is dependent other comparable houses in your area.
For example, if your community has houses that sell for $200,000 with 2 bedrooms and 2 washrooms and $300,000 for houses with 4 bedrooms and 3 washrooms, then there is opportunity to renovate a house with 2 bedrooms and 2 washrooms. The addition of 2 more bedrooms and 1 more washroom might cost $50,000 (determined on further analysis), but your house price will increase by $100,000.