Are you addicted to those shows in which people are buying run-down houses, fixing them up and reselling them for huge profits before the first mortgage payment is due? Wow!
What's more, these people claim they did it in their spare time and made more on that one house rehab than you made all last year! You start thinking: "They don't look any smarter than I am" and suddenly you are buying ever rehab book and thinking about a career change. Before you put in your 2 weeks notice, let's talk about how to succeed at rehabbing houses.
Rehabbing is a very excited topic. It can be very profitable and fun, but it is also risky, challenging, and demanding. I once heard a fantastic catch phrase for rehabbing houses: "You make your money when you buy the house and you get paid when you sell it". If you do your research, pay attention to your time and money, and use some of the following tricks, you too can be successful:
1. Before you ever buy the house to rehab, make sure you are 100% confident you understand what that house can sell for once repaired. Be realistic; don't expect your house will sell at the top of the market. Plan to price it at 5-10% below what it should list for so you can move it quickly.
2. Make sure you understand ALL of your costs. Itemize not only the rehab costs, but your holding costs, your closing costs, and selling costs. Make a budget and stick to it. Include contingencies for unknown problems or repairs during the process.
3. As important as a budget is to develop a schedule and stick to it. Many people begin a rehab strong, but take months (or never finish). Every day you own that house, you are incurring costs including: interest, insurance, taxes, heat, electricity, etc. Every day that you own the property means less money (profit) in your pocket when you sell. Make sure you are not slowing down the project. Keep the house busy with activity.
4. If you plan to do some or all of the work yourself, make sure to be realistic and pick your battles. Again, everyday that the project is waiting on you to finish something is lost profit. Additionally, make sure that the quality of your work and the quality of the materials meets with price point you are working in. Consider hiring talent and quality if you are not sure you can do a project.
5. The potential profit margin of the rehab ultimately drives the amount of work you can do, but newer rehabbers should buy a house that needs a few (potentially major) items to repair, such as needing a new kitchen and bathroom, instead of 100s of small ones, such as new doors here and outside fascia work there and a reworked kitchen here and tons of TLC everywhere. Conversely, inexperienced rehabbers should not take on large projects such as additions.
6. Maybe you have done a great job of finding the right house, keeping your costs in line, and you were on schedule. Do you have an exit strategy? What is your plan if the property does not sell quickly? There are two easy answers: move yourself into the rehab and sell your house or turn it into an investment property and rent it. While moving in may be difficult or impossible, turning it into a rental should be one of your considerations.
Although this is not a comprehensive list of everything to think about when rehabbing a house, these tricks should help you make more money, have less stress, and more fun.
Scott Ficek owns and manages almost 30 investment property units from single family to multi-family. He is also a Investment Real Estate MN Agent with RE/MAX Advantage Plus in Minneapolis and helps new and seasoned investors buy and own Minnesota Investment Real Estate.