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I haven’t talked a whole lot about real estate on The Rich Contractor, but it’s time to change that. It’s time to talk about one of the best and most amazing ways you can capitalize on your trade skills to dramatically increase your net worth over time. And, guess what? You don’t have to deal with a single customer or even travel beyond your local Home Depot to execute this technique. And you can take as long as you want to finish the job. At the edge of your seat yet? Basically, I’m talking about rehabbing your OWN home in a smart and calculating way to quickly boost your equity (and for the sake of this post I’m going to include home equity in the calculation of net worth).
The FHA 203k Loan Is Flipping Amazing
Several years ago my wife and I bought a home with the FHA 203k loan program, and though the process was a bit tedious, we look back on it now as one of the best decisions we’ve ever made. Essentially, the 203k loan allows you to build in the cost of renovations into your overall home loan. Thus, the total loan amount is a calculation of the purchase price of the property plus an amount to cover labor and material costs to rehab the house. I believe the down payment was somewhere around 3.5%, and it should be noted that all FHA loans come with the additional pleasure of mortgage insurance, but this is a small price to pay in my opinion.
The house we purchased was in some major need of TLC. Built 1956, there were many needed repairs and updates that had simply been overlooked by previous owners. So, we rolled up our sleeves and went to town. Some of the work I did myself. Some of it I hired out to other contractors.
In about eight weeks the following list of things were done to our “new” residence:
- New Roof
- New Siding and Gutters
- All New Windows
- New Electrical Panel
- New Kitchen
- New Exterior Basement Stairwell
- Lots of Painting and Tile Work
- Random Clean-Up and Touch Up
Now, don’t get me wrong. Those eight weeks were a bit stressful and chaotic, but when it was all said and done there was an enormous sense of satisfaction that we had just turned a run-down handyman special into a one of the nicest homes in the neighborhood. No longer was it the eyesore of the block that every neighbor cringed at while driving past.
Better still was the fact that we had just skyrocketed the home’s value, which essentially amounted to roughly $35,000 in near-instant equity. As time has gone on that margin between what the house is worth and what we owe has continued to fatten, a result of rising prices and additional improvements that included a complete bathroom remodel. Suffice it to say that we are going to walk away with a very large check when we finally do sell.
Rinse and Repeat. Rinse and Repeat. Have an Extra $4,000,000 in the Bank Come Retirement.
But, the story doesn’t have to end there. My wife and I like the neighborhood and the house and have decided to hang tight for now. But, this process can be repeated over and over again. As long as you live in the residence for two years before selling it, all profits are 100% tax free (up to a max of $250,000). For the average person this can be a great way to build net worth, but for the contractor who has mad home improvement skills this is a scenario that can produce absolutely mind-blowing results! Why? Because you don’t have to pay for labor, and as a professional contractor you’ll likely have access to materials at a cost that is well below retail.
Consider this hypothetical scenario. Smart contractor “Joe” decides to buy a piece of crap house with a 203k loan in an otherwise nice neighborhood as his primary residence. He’s made the intelligent move of finding an area of town where appreciation outpaces the rest of the city as a result of good schools, services, and facilities. He’s going to renovate it whenever there is free time and then sell it after two years. Just for the sake of simplicity, let’s say he does this ten times over the course of twenty years. Granted, that’s a lot of moving around, but it’s really the only downside to this strategy. Let’s say the average purchase price per home is $150,000 with a build-in of $50,000 for improvements. That amounts to a total loan of $200,000. Each time, Joe is able to use his amazing skills to renovate the home, which results in a sale price two years later of $300,000. Each time he’s able to sock $100,000 of pure, un-taxed profit into his bank account. He does this ten times. After 20 years he has a cool million in the bank.
This is IN ADDITION to any savings he has from his actual job (or business) as a carpenter/remodeler/builder/etc. Of course if he’s smart he’s plowing the extra $100,000 per sale into retirement accounts and/or rental properties during those 20 years, so it should actually be worth WELL over a million after 20 years (probably closer to four million, actually). This stuff isn’t rocket science – it’s just a matter of having a plan and executing.
For the nit-pickers out there, yes I realize that this example is a gross oversimplification of the process. Profits per sale will range wildly based on economic conditions and housing trends. And Joe is unlikely to stay put for only two years in each location, but fundamentally this strategy really works. Depending on swings in real estate values it could take 15 years or it could take 30, but OVER TIME this is a fantastic way to accumulate wealth over a lifetime.
Trade skills plus real estate knowledge equals early retirement. You just have to want it.
My name is Jeff and I created this blog in 2007 to help and inspire contractors and home service providers. It’s come a long way since then.