There is tremendous potential currently in the rehab property market. What makes this area so appealing is that you don’t need a license or certificate to get started. One day you can be sitting at your cubicle and the next the owner of an investment property. As popular as rehabbing is there are a few important steps needed for success. You can’t blindly purchase any property, put some work in and expect a return. It takes a combination of several areas to produce the maximum return on your investment. Here are the five most important aspects of any rehab deal.
- Property Location. Simply making improvements to the property alone will not make it desirable. The starting point for any good rehab is to find a property in a solid market. You can do everything right with your rehab but if the market is declining you won’t get the attention you are looking for. The best way to add value to any property is to make improvements in the right location. The combination of desirability coupled with quality is a home run. Start your search by looking for solid markets and go from there. You may have to pay slightly more for these properties but in the end it will be worth it. These are properties in areas that are in high demand. With the right amount of work you will generate interest that will increase the end sales price. There is a reason that the most common phrase associated with real estate is “location, location, location”. Buyers start their search with the location and go from there. If the location is poor you start the process on an uphill battle.
- Rent/Resale Value. When evaluating a rehab property you need to know your exit strategy before you make an offer. Regardless if you plan on renting or rehabbing it is important to know where you stand. One of the biggest mistakes that novice rehabbers make is placing too high a value on the work they do. Improvements are nice but they may not have the impact you are looking for. You need to have a complete understanding of your market before you start. Take a look at the comparable sales and current listings. See what these properties offer and how yours compares. Buyers will pay for quality but not in excess of what is on the market. It is always a risky proposition making improvements greater than what is on the market. There is nothing to compare your property to and buyers typically do not let to set the market. The same is the case if you are considering renting the property. High end appliances and fixtures may help the resale value but they won’t do much to boost monthly rental amounts. Never assume that the work you do will automatically give you a greater return. Always do your due diligence on your market before you put your name to a contract. .
- Repair Costs. The costs of repairs is one of the key components in estimating your bottom line. It is not enough to give your best guess on the cost of repairs. You need to have a firm grasp of exactly what improvements you want to make and the costs associated. This estimate impacts your offer price as well as your estimated resale number. Even if you have an idea of the costs you need to get a second opinion. Ask your contractor to join you at the property and give you a firm estimate number. Going over budget causes a ripple effect on everything else you do. You may try to cut corners in an attempt to reel the budget back in. This reduces the quality which will lower your sales price. In turn this will minimize your bottom line. There will always be some doubt with repair costs but the closer you are the more profitable the property will be.
- Budget. Your budget can’t be a roundabout number. This has to be a firm estimate of your total expenses. In your budget you should have a small buffer for overages. The minute you go over budget you are on the defensive. It is important that before any work is done you have multiple estimates for anyone working on the property. At that point you need to hold these people accountable for these numbers. A few hundred dollars here and there individually may not seem like much but added up over time makes a real dent. Going over budget may cause you to work months on a property that yields only a minimal return. Nobody likes to work for nothing.
- Sales Price. The final piece of the rehab puzzle is often overlooked. When you are finished with your rehab you need to get it sold as quickly as possible. Every day you own the property costs you money. You need to strike a balance between maximizing your profits and selling quickly. Where you price your property is essential. You need to fight the urge to list over market value and hope you get an offer. Listing too high may cause buyers and real estate agents to avoid the property. Instead of getting an offer to start negotiation your property will sit on the market. The longer it sits the less the chance of getting a full price offer. Eventually you will be forced to reduce your price. When this happens your property is seen as damaged goods and lowball offers will come in. To maximize value you need to create a bidding war. The best way to do this is by pricing right and creating demand.
Every day investors are getting involved in rehab projects. By focusing on these five areas you will increase your chances of rehab success.
