Let’s talk about luxury homes for a minute as I get a lot of inquiries about investing in them. A luxury home, by definition, will vary depending on the area. In Orange County, California where the median priced home is almost $800,000.00, a home would have to be at least several million dollars to be classified as a luxury home, in my opinion. Where as in my area the median priced home is in the $200,000 range then a luxury home would be anything around $1,000,000.
Many investors, especially new investors, call me or email me with a luxury home that they have found and are real excited about because they think it’s a real good deal. For example, I had someone recently email me a deal that was worth $1,000,000 and they could buy it for $800,000. Even though it looks like there is $200,000 in profit to be made I want you to realize that with luxury homes you must buy them at a larger discount simply because the values of a luxury home fluctuate so much. I’ve seen the value from appraisal to appraisal change as much as 20%. In the example above… there goes ALL of your profit.
My solution, which I actually learned from luxury home expert Frank McKinney, is that you need to be able to buy a luxury home at no more than 50% of its value to make a good profit on it. This is because there is less of a market for a luxury home making them harder to sell and because of this they can vary in price quite a bit. Please keep this in mind and don’t get too excited when you can get a luxury home at a 20% discount. That’s a good place to start but you need a better deal than that. Don’t think that you can’t buy a luxury home at 80% and retail it and make money on it. That’s not what I am saying at all because there are more things that also come into play here. If you are in a hot market and you know you can sell the property fast at retail and you are totally comfortable with the appraised value then you can make money on an 80% deal. Just remember luxury home values can change fast and there are fewer buyers for them.
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