Turning Ugly into Profits: Rehabbing your Investment Portfolio

Thursday, February 11th, 2010 | Uncategorized

The art of rehabbing ugly houses has received a lot of television coverage in the last few years. If you spend any time watching channels like TLC, HGTV, A&E or others, chances are you’ve seen a show about house “flipping,” where someone buys a cheap house, invests some time and money in fixing it up and sells it for a huge profit. But is this truly how rehabbing houses works in the real world of real estate investing? Sort of, but what’s often missing are the details and risks.

Adding rehabs to your investment portfolio can be very profitable, if you can control your costs and time invested. You have to have a solid plan, just like with any type of real estate investing. Rehabbing a house means you buy a home below market value, fix it up and sell it at market (retail) value – you flip it. That’s where your profit lies. If you can’t control your costs, rehabbing is risky, and can quickly reduce your profits. You have to know what is involved and have a strategy before you dive in and pick up a paint brush – or hire someone to pick one up for you.

Identify the right property to rehab – What makes a good rehab candidate? Simply, an ugly house. It’s the one that is abandoned, vacant, boarded up, or neglected. You’re buying it in “as is” condition, falling down gutters and broken shutters included. Before you dive in and rehab or flip a property, pay attention to the design and location of the house, because after all, you’re investing in a neighborhood. You’ll want to make improvements based on needs and the community standard. It’s really the ultimate in recycling, and is especially effective in up-and-coming neighborhoods.

Evaluate the rehab – Once you find the right property, take a licensed contractor (one who specializes in remodeling, rather than new home construction) to see it with you. The contractor will look at the house with an educated eye, and will be able to identify mechanical, structural and cosmetic repairs that are needed. This will allow you to determine whether you’re going to perform a minor rehab (focusing mainly on cosmetic fixes) or a major one, complete with mechanical and structural improvements. It can also signal whether you’ll take on the work yourself or hire it out to a contractor.

Who will do the work? – If you choose to hire out the rehab work, you need to have that reputable contractor; someone you can trust to do the work and do it right. If you don’t have someone in mind, ask an appraiser for a referral. Appraisers know all about value, so ask who they would work with if they had to hire out the work. This is another great time to turn to your centers of influence or REI club contacts. While having a contractor frees you up to plan your exit strategy and find an end buyer, it makes sense to stay in close contact with your contractor. Make sure he or she understands the entire scope of the project, your budget and timeframe.

If you decide you’re going to do the rehab work yourself, recognize that all of your time will be wrapped up in this project, leaving you short when it comes to finding other real estate investment deals, or even a buyer for this house. For your budget, be conservative and build in money for things that go wrong during the rehab process. It is not uncommon for repair costs to spiral out of control and overwhelm your estimates. The odds are against you. You’ll need to factor in materials, permits, additional labor and more. There are things that you can do to help yourself. Become familiar with local suppliers and types of construction materials. Find out about any discounts that are available to you. You might even want to pick up a copy of the National Repair & Remodeling Estimator by Albert S. Paxton. This book will help you plan your repairs, and is a smart use of $40 (or less, if you buy it used online). Any ways that you can cut costs without sacrificing quality means more money in your pocket.

Plan your exit strategy – A well thought out exit strategy, finding an end buyer as quickly as possible, is crucial to a successful property rehab. If you can’t sell the house as soon as it’s all pretty again, you’re digging into your profits. Turn to your buyers list and your centers of influence. The longer you hold on to the property, the more you’ll have to pay in carrying costs.

If you’re interested in rehabs for your investment portfolio, a proven system will help you keep costs under control and projects completed on time. SREC has those systems for you. To learn more about rehabbing and other successful real estate investment strategies, and how you can become a stronger investor, sign up for our free Silver Membership today.

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