When planning a rehab project, most investors think about the profit margin but most never give any serious thought to the downside. What is your exit strategy? How do you manage to sell a property that is sitting on the market for weeks? What happens, when you suddenly realize that a house requires more work than initially planned? How do you play the game when the circumstances are not in your favor?
The answer lies in following the principals. Any deal can be successful if you are careful with property evaluation, price analysis, and teamwork.
Rehabbing homes is a business. It is not about luck or gambling. You are spending your money to create a product that will benefit your customers and will bring you a good return on investment. It is critical to invest in a property that aligns with your goals. Without argument, location is the most important factor. As the saying goes, you can change almost everything about the house, but it is not possible to improve the neighborhood.
The first principle of home rehabbing says, buy a property that requires the right amount of work at the right price. The chances of achieving success increase significantly when you do that.
It is easy to assume that you’ll buy that home for $125,000; add $40,000 for repairs, and you’ll sell the house for 225,000. You can do these one-page calculations, but this doesn’t guarantee success.
Successful investors know the game, inside and out. They know what it takes to remodel a house successfully. You’ll need talent, support, human labor and time. You need to consider the repairs, mortgage expenses, interest rate, utility bills, and the cost of holding property. Only after understanding the complete picture, you can decide whether a rehab project will prove to be profitable or not.
After calculating your ROI, you need to find people who will support you throughout the process. These are the people who will be working days and nights to build a home that you can sell to earn a profit. Your team members include contractors, designers, architects, engineers, home inspectors, realtors, suppliers, and lenders. Treat everyone with respect. Whenever possible, meet your team and have fun rehabbing the house together.
An important aspect to understand is that you are in this game for a long run. You don’t want to finish just this project; you want to complete various projects over the year for a very long time. If you’re going to go that far, you need a loyal & trustworthy team that will help you accelerate your business.
Every rehab project you undertake must align with the pre-discussed budget. There are various real estate formulas for establishing a baseline. Take the example of the MAO formula, which stands for Maximum Allowable Offer = ARV (After Repair Values) x 70% – Repairs. However, these rules are general explanations. Each property is unique. You’ll need to create a unique plan, but the point is to stick with the budget. Don’t overdo things because that’ll force you to list the house at a price above the market value. No matter how much money you spend on remodeling, the price of a home is determined by its location and facilities. If you overdo renovations, it will only result in a delayed sale or loss.
Goal#1: A home is probably the most substantial investment, a person or couple makes. It is essential to focus your efforts on producing only the best for this family. To make this happen,
Goal#2: You need to find the house at the right price, invest in the correct repairs, take on required renovation projects and spend just the right amount of time and money to turn the goal into a reality.
As an investor, the end goal is to turn the deteriorated or outdated home into a beautiful residence and sell it to the family seeking that residence. You should keep that end goal in mind.
You don’t want to hold the houses for too long. Along with the rehabbing, you must also focus on the marketing section. Come up with a suitable sales price. Add the amenities that your customers want and market your home aggressively to sell it soon.