As part time and experienced real estate investors it took us a while to stumble across some of the subtleties that drive success, cash flow and wealth. As strictly buy and hold investors who hate to sell a property we didn't always understand how we could take the concept of creating value and use it to our advantage.
When ever we heard or read about creating value with real estate it was always in regards to flipping houses. We are certain other experienced investors are searching for deals that fit the following model and as a new investor you have to be on the look out for these value add opportunities. Unfortunately when we started out many years ago it was not obvious until we walked into a house and it hit us like a ton of bricks (we owned a couple of properties at the time).
We were standing in the living room of what was advertised as a 3 Bedroom, 2 Bath (3bd/2bth) home. It had 3 bedrooms down the main hallway, a kitchen, family room and then what was called a bonus room off the family room. Now we had been investing in the market for a year or so at the time and we knew that in our market a 3/2 would rent for $995.
The more time we looked at the bonus room the more obvious it became to us that we were actually standing in what should be called the 4th bedroom. We calculated that for under one thousand dollars we could add a closet and frame in a door to make a legit 4th (and private) bedroom. The power of the 4th bedroom in our investment area given the attached 2 car garage is that we could now get $1,095 - $1,150 rent.
Standing in that bonus room for us was like our own little eureka moment. We realized that we were buying a 3bd/2bth house but we would be renting a 4bd/2bth house. We have taken this simple concept since our eureka moment and purchased dozens of homes that fit this basic structure. The most profitable creation of value in our experience is buying and old 2bd/1bth house and finding a way to create/rent a 3bd/1bth house. This simple exercise for a buy and hold investor is very powerful. You take a house that might bring in $750 rent (in our area) and explode the income up to $950 by creating a 3rd bedroom.
We have a few recommended take a way's for the new investor:
First you need to learn your rental market and what features or items drive expected rent higher (Bedrooms, Baths, Carport, Garage, Yard, etc)
Then as you are looking at real estate always ask yourself if there is a way to create value (more rent) with the current house?
The most profitable way is to find a house that can be purchased for a discount to the value you could create. For example an old 2bd/1bth houses in our investment area go for around 60K-80K depending on condition but a 3bd/1bth house will run 90K.
So buy a 2bd/1bth house but RENT a 3bd/1bth house. The more often you can do this the more value you will create!!! More value equals more cash flow and more wealth. Keep in mind most houses you will see will not fit this easy value creation but when you find one it is very profitable. In our experience about 1 in every 20 older homes has a way for us to create value/more rent as buy and hold investors.
For more investment articles aimed at new investors you could visit http://www.wealthbuildingpro.com.