As an investor, you need to be much more focused on the bottom line rather than the number of properties you own. It really doesn’t matter how many properties you have; they are essentially hurting your business if they don’t make you money. It is easy to think that the rehab process is a simple one by watching one of the home flipping shows on TV. In reality, a lot more goes into the process than is typically shown. If you want to get the most out of every rehab, you need to constantly focus on the bottom line. While a simple concept, maximizing every deal you take on is a critical component to success that many overlook for one reason or another. Do yourself a favor and give yourself every advantage possible.
Numbers should drive everything you do in business. Falling in love with a property with mediocre numbers will only offer you mediocre returns. This is time and energy that you could have spent working on better deals and growing your business. A property may have everything you are looking for, but the numbers should be your ultimate decision maker. In spite of what many investors may think, the numbers are the most important thing in any deal. You can’t just will and wish your way to a successful transaction if the numbers aren’t there.
Evaluating the numbers starts with an honest estimation of repair costs. Before you even know what you should offer, you need to have a firm idea of what your expenses will be. You can make any property work if you bend your numbers enough. All this will do is start you out behind the eight ball and leave you with a property you wish you never got involved in.
It takes years of looking at properties to accurately estimate every cost and know exactly what needs to be done to give you the best return. If you are still unsure about the numbers, you can bring in a second contractor for an inspector. There is often such a rush to get an offer in that this part of the process is hurried and done hastily. This is the most important step in any successful rehab deal. If your estimates are off, everything else in the deal will be impacted.
However, estimates are only the first of many steps. These estimates should be treated as such. As every seasoned investor knows; you should expect the unexpected once your work begins. Things will happen that will require you to shift gears on the fly and deal with new challenges that you may have never expected. This is why it is important to have a cushion on every property. Very few rehabs will go off without a hitch. A good contractor should catch most of these items, but some of them will be completely unexpected. If you are hoping that everything goes right from start to finish and all of the estimates will be below what you expect, you are asking for an awful lot.
Having a good plan and a schedule are necessities for any rehabber, but you need to execute that plan to make it all work. This means shuffling in your contractor, painter, electrician and anyone else that is working on the property. Time is literally money on every deal. Therefore, it is critical to follow strict dates and quotes. Your labor costs are often overlooked and not looked at closely enough. It is not enough to just get the work done on a rehab, the quality of the work is almost as important. If you show up to your property once every few days, you will not know if something is done sloppily or even at all. A contractor can only do so much in the way of watching what everyone is doing and how they are doing it. This is your property and you need to know what is going on at all times. This doesn’t mean you have to micromanage every person on the site, but you need to know who is working, how they are doing it and if you are satisfied in the quality. A few overages here and there in your labor costs and soon enough a great deal turns into an average one.
The more deals you do, the more you will know what to look for and how to best spend your money. There is a skill in spending money in the right places and saving money in other areas. Most markets are highly competitive. The slightest changes in labor, materials and other costs can alter how you look at a deal. It is critical to stay on top of these costs and spend the time to do your homework. Breaking even or even losing money on a deal will provide a good lesson for what not to do on future deals, but you don’t want to have that happen to make a point.
Rehabbing properties is all about the bottom line. Profits can get erased very quickly if you are off with your estimates or your labor is inefficient. If you have to come up with a system or a spreadsheet to help you in this process, do it. It is not how many properties you have under contract, but the profits you make from them.
