It seems like everyone wants to be a rehabber in today’s real estate investing landscape. There are more shows on TV dedicated to this side of the business than all the others combined. While anyone can buy a property with the intention of fixing it up, it doesn’t mean they will be successful. One of the common themes for new rehabbers is that the process is much more difficult than they thought it would be. The idea of rehabbing is simple; the execution, however, is not. If rehabbing is an area you want to get started in, there are a few paths you should follow. Here are five industry secrets that will help you on you next rehab:
1. Finding deals can be difficult: If you have ever watched a flipping show on TV, you are probably aware that they conveniently glance over the acquisition of the property. What is glazed over in minutes on television is typically the result of weeks, if not months, of work. This is by far the most important step in the process. You can always find deals, but the key to a successful rehab is finding a great deal. To do this, you need to have multiple sources of lead generation. Simply relying on your real estate agent to call you when a new property hits the market is not enough. By the time they call you, there could be three to four other investors in your area who know about it. You need to network and try different channels of marketing. The more options you have to get deals, the more likely you will find a good one. This can be very frustrating at times, but is critical for rehab success. Without good deals, you won’t be successful.
2. Reserves are important: Rehab deals cost money. Whether you have private money backing you or you have your own funds, the odds are you will dip into them at some point. There are many little things that will quickly add to your bottom line. Every property inspection, title search and utility cost needs to be accounted for, and these are just the costs to acquire the property. Once you take ownership, you may need to pull permits, pay for materials up front and cover the carrying costs. The more rehab deals you work on, the better you will become at estimating these costs. As a rule of thumb, you should always overestimate rather than the other way around. It is not too much to add an extra 10-15% to your estimate. Some of these costs need to be paid up front. You need this capital in place to make the rest of the transaction work. Whether you plan to use your own money or someone else’s, you need to have reserves you can dip into at any time.
3. Be prepared to work: Not every rehab deal will be a home run. These deals are more of an exception than a rule. There are many instances when you will need to work tight to maximize your profits. This could call for you to get your hands dirty. You don’t need to be an expert to accomplish the minor tasks that rehabs call for. Anyone can rip up rugs, put garbage in a bag and remove the existing cabinets. There can be thousands of dollars saved in every deal, simply by doing some of these tasks yourself. Even if you don’t want to get your hands dirty, you still need to work to get things done. You can’t expect to just drive to the property after your work day and see all of the wonderful progress that was made. You need to be ready to make difficult decisions, resolve disputes and get people in and out. There is plenty of work in every rehab deal. You need to be prepared for all of it.
4. There will be issues: You might as well pencil it in; complications come up in nearly every rehab deal. Instead of fighting the idea that everything will go wrong, simply embrace it. The quicker you can move from plan A to plan B, the quicker things will move forward. You will have plenty of people coming in and out of the property, and managing all of them is not easy. Not only do you need to schedule everyone, but you need to deal with everyone’s personality. Sometimes these personalities will cause conflicts that will impact your bottom line. There will also be issues with the actual property. You may find something out that you didn’t expect or that costs you more than anticipated.
5. You may not sell for as much as you think: Some rehabs require more work than others. It is typically those properties that you have unrealistic expectations. Sellers don’t care about all of the work you did; they care more about the quality of the work. Just because you completely transformed a property doesn’t mean it is worth more than what the market indicates. Always do work according to what the numbers tell you. Granite counter tops don’t work for every property. If you want to get the most out of your property, you will listen to the market and temper your expectations.
No two rehab deals are the same. There may be similarities, but there are always subtle differences. Keep these six items in mind as you chase your next rehab deal.
