Tips for Maximizing Your Rehabbing
One of the most common real estate strategies is rehabbing. There are entire TV shows devoted to this particular aspect of real estate investing, and as a result, it is also the point where many beginning investors start.
What they do not realize is that it is also the strategy where the MOST things can go wrong. Since there are so many moving parts, it is critical to make sure that everything is as it should be or you will likely struggle with this strategy.
What are the moving parts that cause issues for new investors?
- Finding the right contractor
- Correctly estimating the repair costs
- Staying within budget on the repairs
- Correctly identifying the resell value of the property once renovated or the correct market rent so that it is competitive with the rest of the market
- Finding the right buyer (or renter) for the property
When rehabbing a property, it is important to correctly handle each of these areas to successfully navigate the transaction so that your profit is secure. Let’s review each of these areas.
Finding the Right Contractor
This step is critical because a contractor can make the transaction much easier, or they can make it extremely frustrating.
You want to be meticulous and thorough when it comes to finding the right contractor. Interview at least three to five contractors at a minimum. Even if the first contractor is great and says all the right things, you want to talk to other contractors because they will either confirm that you were right (by their attitude or prices) or they will give you an indication that another one is better.
You want to find a contractor that has plenty of experience, can do the work quickly, and has great references that are satisfied. If the contractor cannot provide you with references of their work, then you will automatically know that you are talking to the wrong person.
Also, never pay the contractor in full up front. Pay them a percentage of the total estimate up front and then pay the rest after inspecting their final work.
Correctly Estimating Repair Costs
Many beginning investors underestimate the repair costs and then purchase the property at the wrong price; therefore the deal will no longer be profitable. How do you effectively estimate the repair costs?
Well, to answer that question let’s look at the long-term perspective as well as the short-term perspective.
Long term: This is one part of the business that you will get better at the more you do it. As you gain experience at estimating costs for materials and labor to repair things, it will just get easier and easier. Some things can only be learned by experience.
Short-term: You can do several things to make sure that this area does not come back to bite you at the end of the deal. First of all, tie up the property with an offer and make the offer subject to an inspection. Once you know you can make the deal work, then it is time to confirm it. Have a contractor accompany you to the property and get an estimate from them. If it fits within what you estimated, then you can proceed. If not, then you have the option to renegotiate the deal or to cancel it and walk away.
When calculating repairs on your first few deals, overestimating the deal is better than trying to be too tight.
Staying Within Budget on the Repairs
The fact of the matter is that repairs are almost always going to cost more than the estimate provided by your contractor. Since this is the reality, the important thing is to deal with it.
That means you need to build in a little excess to the estimate that your contractor provides you. Another tip that can help is to provide the contractor with a bonus for staying on time and on budget. That makes it so that they are invested in doing the job as they said and within the time frame stated. Quality of work (based on your inspection) is also required for the bonus to be given, since we don’t want to bonus them for taking shortcuts.
Correctly Identifying the Resell Value or Rental Value
This is where your power team is critical for your success. Regardless of whether you are going to resell the property or rent it out, you should have the appropriate power team members that can assist you with this.
If you are going to resell the property, then you need to have an experienced real estate agent that can do an analysis of the market and identify at what price the home would sell for and how quickly it would sell.
If you are planning on renting it out, then you should have a qualified property management company that can advise you on the proper rental price.
You don’t need to do this business alone. In fact, trying to do it all on your own is one of the quickest ways to fail. Rely on professionals with proper training and experience that can assist you in making this transaction profitable.
Finding the Right Buyer/Renter for the Property
This is another area where you need to have the right power team in place.
What you really want to know is what kinds of repairs you need to do to the property so that it is going to beat out the competition of other homes on the market. You want to repair the property so that it is better (or at least competitive) with the other homes in the area. Your power team can provide you with this kind of valuable information.
As you can see, there are plenty of factors that you need to consider to make rehabbing the property a successful transaction with a profit. Even though there are a lot of moving parts, all of these can be navigated with proper attention and effort to make the deal work.
You want to have information like this before you get into a deal so that you do not have to learn some of these lessons by painful experience. Gaining information before taking action will help you make the most of any of your investing efforts.