A few months ago, I made $1 million on a house…
I’m not saying this to brag, because I know many people who do this regularly. The beauty of it is, I will pay very little in taxes on this $1 million. In fact, I am going to discuss two strategies with you where you can make $1 million on a single house. I’ve personally done both, so I speak from experience.
First of all, this doesn’t work equally well in every real estate market. You need to be near a market where houses commonly sell for 7 figures in order to take advantage of this particular strategy (see future articles for strategies that work in lower end markets).
As of right now, those markets are: San Francisco Bay Area, New York City area, Washington DC suburbs, Los Angeles + Orange county, Boston, San Diego, Honolulu, Portland, OR; high end Chicago suburbs, Austin. If you don’t live in or near one of these areas, don’t despair. You may still be able to invest remotely. But it is more challenging. So how can you make $1 million on a house:
1. Buy a fixer upper house a bit below market value where you can add square footage. In the San Francisco Bay Area, my market, for example, many areas are selling for $1300 a square foot. A 1500 s.f. house would thus sell for $1.95M, while a 2500 s.f. house would sell for $3.25M in the same neighborhood. Look for these kinds of price spreads. Do your homework and talk to contractors about the cost of building (currently $300 to $350 per s.f. here in California). Just by doing a home addition (in the right area!), it is thus possible to add $1 million in value. Even better if you can get it a bit below market (we will discuss strategies to do this in future articles). Move into it and stay for 2 years. If you’re married, this gives you a $500K tax-free gain. The rest of the profit is subject to long term capital gains tax, which currently maxes out at 20%. Therefore, a $1 million gain can be potentially subject to $100K in Federal taxes, effectively 10%. * If this seems too simple, I can tell you that I know many investors who use this strategy every two years. With real estate, most of this money can be borrowed, so you don’t need millions in cash to make $1 million profit. There are even more ways to finance the second strategy:
2. Building a luxury new home in a desirable area can often result in profits of $1 million or more. Again, it is important to do research to find the areas where homes sell for millions of dollars, without sitting for many months on the market, as well as what kind of homes sell, and to consult with architects, contractors and real estate agents about the process. One advantage of real estate over most other businesses and investments is how easy it is to raise or borrow money to do deals. I made millions of dollars in real estate before I used any of my own money. Partnerships can be structured all kinds of ways, and there are all kinds of loans available. You don’t have to have perfect credit. As a real estate developer, many times I made $1 million by building a new house, and we once made close to $2 million on a house (purchase price: $1,480,000; resale price: $4.5 million; cost of construction about $900K; a couple hundred thousand in commission and other holding and closing expenses). I cannot emphasize enough the importance of selecting the right location – one with strong demand for multi million dollar homes; as well as working with the right professionals. Maybe this seems too daunting, but I can tell you I personally know many people who came from different backgrounds, not related to real estate or construction at all, that got into the real estate game and made millions this way. As I have personally done. We will be sharing more articles on real estate investing soon. All the best!
* Disclaimer: Tax laws can change and vary by jurisdiction. None of this is meant as tax advice. Please consult a tax professional.