Follow the Builder Strategy

When the real estate market cools, the profit potential of homeownership cools as well. Here’s an old strategy called “follow the builder.”  It is most typically used by more mobile homeowners who don’t mind moving every 1-3 years looking to scale at a growth curve and/or investors who have a modified rent-term plan they feel comfortable with and a solid renter pool which will keep the home value in line with the neighborhood as more equity builds. It’s not rocket science and works well if this type of mid-term game plan is up your alley as an investor.

It is relatively easy to make a profit when you sell your home if the market is rising sharply as it has been in many areas of the country and conversely it becomes more difficult when a hot market slows down. As all investors know, it’s very difficult to make a profit on the sale of a home when prices are falling unless you can get really creative. 

Is there a way to be relatively sure you’ll make a profit when you sell your home? The answer is  “Yes, there is under all but the most negative market conditions if you take the time to educate yourself and put that education into play.”  In fact, I’ve seen eager and aggressive investors and homeowners use this maneuver multiple times, even when they don’t even need to move.

Follow That Builder

An important opportunity that can’t be overstated is to research your area’s builders.  In many areas of the country, there are builders who build hundreds of houses each year within a fifty-mile radius of each other. They build entire communities or are one of three to five builders who build entire communities around big employment centers. 

New Community

Builders will typically sell first phases of communities for significantly less than later phases.  Reasons for this are that they a) need to get the cash flow moving, and b) it is harder to sell at high prices because the community typically consists of dirt lots and construction equipment. Put these two things together and you get c) a great profit opportunity.

The idea is to get in on the first phase of the build-out. You will purchase the home at a discount, which gives you built-in equity. As the community is built up, you sell the home for a profit at a higher price. While you’re doing this, you keep tabs on the builder’s projects and find another location where you can do the same thing. 

If you’re the homeowner, you’ll end up living in each house for a year or more and picking up nice profits along the way. The only real downside is you have to move repeatedly.  If you are a savvy investor, you’ll be able to cover your mortgage rental expenses while building up equity which you can convert with a much bigger sale down the line.

Tax Consequences

As with all strategies that put profits back onto pocket after savvy business moves, you need to be aware that generating profit this way can have tax consequences. You need to discuss your plans (including projected timing and profit potential) with your tax professional to make sure that you capture all the deductions you can, file correctly and get the maximum return for your investment strategy.  For investors, you want to make sure that all accounting and payments are recorded correctly in line with your entity structure for your business.

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