The real estate market is HOT right now and everyone seems to be getting into investing. The excitement of those flip-it shows and the strong economy has everyone looking to make quick money buying, rehabbing, and re-selling real estate.
But, beware. There are some really easy and common mistakes with rehabs, especially starting out. Here are just a few to watch out for:
1. Overpaying when you buy – The most important function if you want to make money in real estate comes at the very beginning – you must buy right – not overpay. In order to do that, you must know how to negotiate and you must know the correct numbers so you don’t pay too much when you buy. What numbers?
- ARV – the after repair value or the full retail value. You’re buying at a discount so what will it be worth after you rehab it?
- Rehab Costs – you can make a list of all the things that need to be done to the property, but do you know what they will cost? Even if you plan to price and purchase items on your own at a discount, what will the added costs be for labor?
2. Underestimating repair costs – refer to item #1 above. There will be items that need repair that you don’t notice until you’re already into the rehab, items that cost more than you expect them to, and items that will be added at the end by the buyer when you sell. Everyone underestimates repair costs. All the time. You will, too, so figure that unknown into your costs.
3. Not enough funding – There are so many funding sources available. You should know what the different ones are and qualify for all that you can. Friends, family, private money, your own money, all run out. Have you been approved for Hard Money borrowing? You should be. Imagine finding that perfect deal and not being able to buy because you don’t have the funds when you need them. UGH! Don’t let that happen to you.
4. Hiring the wrong (cheap) workers – Big tip here – it’s not just about the money. Hiring skilled workers who have licenses and insurance will cost more than the handyman down the street or a friend of a friend, but it can actually save you money over having work done wrong or not finished on time (or ever…). Make sure to check references and don’t give any workers money up front. Pay for completed work and final pay always comes after final inspections and all work has been approved.
5. Spending too much time on your rehab – taking too longs costs and can make the difference between profit and no profit. There is a daily holding cost that you need to know for any property you’re holding which include:
- yard maintenance
These costs mount up, quickly. If you hire one guy to do a $15,000 rehab, it’s going to take too long. Make sure the person you hire has a crew and don’t hesitate to get everyone going at the same time – roofer, landscaper, interior clean out and/or paint. And a vacant property in the rehab process is a prime target for theft.
6. Expecting higher ARV – Don’t think your house is bigger, better or badder and, therefore, will bring a higher selling price. Not necessarily. Don’t get greedy. Holding out for a price higher than the market wants to pay will end up costing you. Have realistic expectations about the total value of your rehabbed property and set your asking price a little below that if you want to sell it quickly (you do). Time is money. Sell it and move on to the next deal.
7. Having multiple exit strategies – A ton of gurus and coaches teach that you should have multiple exit strategies for every property you buy, but we have found this hurts deals as much as it helps. True, you need to understand all the ways to sell – full retail, wholesale, rental, etc. – but don’t figure those for each deal. I see investors who buy in order to flip, but rationalize they can always put a tenant in if they need to. Problem is, this thinking makes them lazy. They pay too much for the purchase or over rehab and, when they can’t sell it, they say it’s ok because they’ll just keep it and put in a tenant. You don’t want to hold a property that has $15k-$20k of your hard earned rehab money sitting in it. Too many of these deals and you’re completely broke.
These are some of the main points, but what can you add?