If you watch any TV program on real estate investing, it would appear that the only way to make money is by flipping properties. While this is certainly a viable option, it is far more difficult than TV often portrays it. There is a process in finding the right properties, doing the right work and then selling it for the right rice. Inside of these three areas are plenty of potential pitfalls that can derail the deal or at least put a dent in your profit. Before you contemplate your next flip, there are a few things you need to know about the process. Knowledge is power. The more you prepare yourself, the more you are able to mitigate risk.
From the outside, it would appear that a flip, or rehab, deal starts with the property. A good property is essential. but knowing the market you are investing in is more important. You can buy a great house. but if the location is poor you won’t be able to do much with it on the back end. The best rehabbers know that you need to be able to sell the property, which requires knowledge of the market. You will make whatever adjustments and upgrades you want to on the property, but the market is something you can’t improve. A good market and location will dictate what kind of work you do, what your purchase price is and how much you think your after repair value will be. Before you start looking at properties to rehab, you need to know what market to look in.
The success or failure in every rehab is based strictly on the numbers. If your numbers are off, the deal won’t be a success. This means knowing the right price to pay for the property, what the holding and improvement costs will be and what you can sell the property for. Sounds easy enough, but many investors fall short in estimating these numbers. They are either unrealistic or inaccurate in their assessments. If you don’t factor in every expense, it will have a snowball effect on the rest of the work you do and what you list the house for. If you find yourself over budget, you may want to make it up by listing at a higher sales price. This could keep your property on the market longer and each day the house is on the market the lower your return will be. If you know what the numbers are, you can get in and out of deals quicker and close more throughout the year.
Once you have the property and reviewed the numbers, you need to put your stamp on it. This means doing the right work for your specific neighborhood. Doing work just to make improvements will not get you the returns you are looking for. You need to examine what has sold in the immediate area and what buyer’s preference is. If you put a pool in a yard in the Northeast, there is a decent chance that buyers would rather have the yard space over the pool. What you think you are getting by making an upgrade will come back to haunt you. The same goes for the finishes, fixtures and seemingly little touches you make to the property. Granite countertops and limestone flooring may seem like a home run, but if is not in line with the market, you are wasting money and won’t get the return you are looking for. Doing the right work is critical in getting the highest return on your investment. This starts with knowing what buyers want and the right people to do quality work.
After you go through the process of finishing the house, you need to get it sold. At this point you may want to exhale and feel like your job is done, but this is where you make your money. Even if you enlist the services of a realtor, you need to do your part and make sure the house always looks great and everything is in top shape. Since you have some attachment to the property, you probably feel it is worth more than it really is. You need to fight the urge to list it for more than the market says it may be worth. If you list the property too high, it will sit inactive on the market for weeks not attracting buyers or realtors. This will decrease demand and lead you to getting less than you expected. Listen to the market and the advice of your realtor and list for the true market value. You may just end up getting over asking price.
Rehabbing a property is not rocket science, but it is not as easy as it appears on TV. There are many steps involved in the process and many things which you need to stay on top of. Not every rehab deal will be a home run deal. Sometimes you need to make a small profit and be satisfied with that and move in. The minute you start to get greedy is when you swing for the fences on every deal and run the risk of losing money. The best rehabbers have a good team around them and let them do their job. The more deals you are a part of, the more you will feel comfortable with the process, the numbers and the steps involved with every deal.
