Essay on Investing in Real Estate

.Given the choice between two investment properties—both 3-bedroom, 2-bathroom, 1,700-square-foot single family residences listed at $125,500, one a turnkey in Stockton, California, and the other a fixer-upper in Chapel Hill, North Carolina—and the singular goal of turning the maximum profit on my investment, I would choose to purchase the Chapel Hill home. Because I believe that the listing price of that property is lower than its true value, and because I expect a growing real estate market to increase the value of the home by 10 percent over the next two years, I think that with an additional investment of $50,000 in renovations and a two-year buy-and-hold rental strategy, I could flip the Chapel Hill home for more than $180,000 in profit.As is, the Chapel Hill home is worth significantly more than $125,500. In October of 2013 (the most recent month for which data is available), a middle-of-the-range 3-bedroom home on the market in Chapel Hill was listed for $154 per square foot, and sold for $150 per square foot, according to real estate market data aggregated and reported by Zillow. For a 1,700-square-foot home such as the one on offer here, those numbers equate to a current median listing price of $261,800 and a current median sale price of $255,000. Other estimates of 3-bedroom prices-per-square-foot in Chapel Hill, such as those provided by Trulia, are only higher. Even granting a generous 30 percent discount on Zillow’s median list price for this property’s needed cosmetic updates, $125,500 is still a full $53,000 less than the property’s true market value. The data suggests that if I were to simply buy the home and the following day relist it at its true value price, I could expect to sell the home—without waiting …

…y 2011 prices, and after significant renovations to the property—I believe I could easily sell the Chapel Hill home for $338,640, the projected median sale price of $282,200 ($166 per-square-foot for a 1,700-square-foot home) increased by 20 percent for the property’s turnkey condition. Less the purchase price and the $50,000 cost of the renovations, plus the rental income of $17,419.65, the total profit would be $180,559.65—an outstanding 143.9 percent return on my initial investment. And that is assuming that Zillow’s price data—the lowest I found—is the most accurate, and assuming that the real estate market merely recovers to 2011 prices rather than surpasses them, and assuming that the rental rate I can charge for the newly-renovated property in 2014–2015 is still even with the 2010 market average; the true return on my initial investment could be even higher.

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