Building Wealth as a Home Owner

Everybody needs a place to live, so why not build wealth along the way? Today's tax laws benefit home owners. Home owners who lived in their home for two or more years don't pay capital gains taxes on the first $250,000 of profit she is single, and $500,000 if they are married.

So, how do you actually make money? The first rule of real estate investment is: "In real estate, you make money when you purchase, not when you sell". This means that you need to make a wise buy in order to make a profit when you sell.

Here are a few strategies to build equity on your primary residence:

Buy, Fix and Sell

Fixer-uppers are divided to four categories: Cosmetic, Rejuvenated, Broken-Back and Scrapers. The Cosmetic fixer-upper is a home that needs some TLC. The Rejuvenated fixer-upper will need more than just paint and new tiles. It will most likely need a renovated kitchen and bath. The Broken-Back fixer-upper is a property that has a major problem, such as a cracked foundation or electrical issues. The Scraper is a property that needs to be torn down and built from scratch.

Since most of us are neither developers nor contractors, I recommend starting cosmetic fixer-uppers. You don't need to be a professional to be able to paint your home, re-grout your bathroom or even fix some cracks in the walls. Hop over to your local Home-Depot and attend a course on painting, fixing walls or install tiles.

When you purchase your fixer-upper, make sure you buy it at the right price. You begin with the price you believe you can sell the unit after it is renovated. Then you subtract the cost of materials and labor, as well as your expected profit. Be generous when valuing the cost of labor and materials as additional costs always seem to arise.

After living in your home for two years, sell it for a profit and keep all the proceeds tax-free.

Advantages:

• Get lower interest mortgage (primary residence mortgage)
• Buy at lower than market cost
• Control - You get to choose the finishes and timing
• Interest on your mortgage is tax deductible

Disadvantages:

• Need some skills.
• Inconvenience - need to live in a "construction zone"
• You need to invest money and time to fix your home.

 

Emerging Markets

If you live in an urban environment, you probably noticed that your city grew in the past few years. There is a reason for that. More and more people are coming to the city and as the demand for properties increases, developers are building, converting and renovating properties on the borders of the city.

As one who wants to build equity, you need to buy in a neighborhood that will appreciate faster than the average in your area. If you'll buy in an “up and coming” neighborhood, it is very likely that your property will be in a mature neighborhood within two years, exactly when you need to sell without paying capital gains taxes.

Here are some characteristics to consider when analyzing a neighborhood:

• Does the neighborhood have the proper infrastructure such as public transportation, proximity to major work areas and amenities?
• What is the pipe-line for the neighborhood? How many new buildings are planned to be built in the neighborhood?

Advantages:

• You don't need to do a thing.
• Properties are appreciating faster.
• You get to buy for a better price than a mature neighborhood.

Disadvantages:

• Need some market knowledge.
• You don't get to live in a mature neighborhood.

 

Condo Conversion

This one requires a little more from you. You buy a two-family or a three-family property, live in one of the units and rent the others. After two years you move into another one, and two years later you convert the multi family to condos and sell the two you lived in and move to the third condo.

Buying a multi family is often less expansive than to buy three condos individually. So when you sell them, you will earn tax free proceeds and hopefully you made some passive income along the way.

Advantages:

• You purchase one property instead of three.

Disadvantages:

• It costs money to convert multi family into condos.

 

Buy and Sell Every Two Years

Take full advantage of the beneficially tax laws. Remember that you don't make a real profit if you don't sell your property. Think where you want to be in ten years. What is your dream house? How much will it cost you?

By applying the above techniques, you can build your equity and continually snowball your profits to achieve your real estate goals.