Rehabbing Property for Profit

You see a couple dressed in Hawaiian shirts sipping cocktails poolside. They smile and say “we made $70,000 on our first deal and haven’t picked up a finger since.” Another guy holds up an over sized check for $125,000 and gushes over his latest deal. Flipping properties and rehabbing and selling is always a hot-topic when it comes to Real-Estate investments. The late-night TV gurus have been selling people on this concept since the conception of Cable TV. As is true about every investment avenue people make money and people lose money. The same folk that are drawn to the pyramid schemes are often the same ones that look at Rehabbing and “quick turning” Real Estate for easy profits. I will give some tips to starting the business or avoiding it completely depending on upon you.

First of all, whether you make money in this facet of Real Estate depends a lot upon your knowledge and also anyone in your personal sphere. Your personal sphere should be made up of people that have more knowledge than you in a variety of different areas. Taking for example Mark, a professional rehabber, he uses a number of experts in areas outside of his personal expertise. He has a guy that does siding and roofs and can quickly give him an estimate on work that needs to be done before he buys a property. He has a mortgage broker that works specifically with the types of loans that are required for rehab properties. He uses my expertise when considering the financials of a property and what neighborhoods are best to buy in. He also wants me to have a marketing plan in place before we buy the home! This is an area where a lot of people go wrong. Often times you can have the property sold before it is complete alleviating expensive holding costs after the work is done, and before a buyer can be located. He can do certain types of the work required to bring a property back from the poor condition in which he buys them so those are the areas that he concentrates on. Way too often people try to take care of all of these areas themselves. Rehabbers will try to save a few thousand dollars by selling the property on their own, and they often fail miserably in this area because of a lack of knowledge and time.

Be extremely careful when you put your Sphere together. If you are starting out fresh try to find a mentor that already does what you want to do. One of the greatest Ideas that I have ever heard was when a person offered to work with a skilled carpenter for free for several weeks. I know it doesn’t sound fun but Image all of the useful experience that person gained. If they went to tech school they would have had to pay thousands of dollars for the information, and they would most likely not have gained the “hands on” experience that they did. Do the same with a rehabber or quick turn investor. Most people would be happy to work with you because you can sell them on the Idea that if you find a deal that you can’t handle you will call them with it.

You also need to realize the areas that are not your strengths, and allow someone else to do them at a high-level. My wife and I have rehabbed a few properties, and I quickly came to realize that Plumbing, Electrical work and floor-sanding were not my areas of expertise. Dominque my floor guy can make old floor shine like glass. I have seen sanded floors that are wavey and uneven, and I know that I wouldn’t do much better. Therefore, Dominque does all of my sanding.

Don’t be afraid to farm-out some of the work you’ll have a better looking product in the end and you’ll feel better about the process.

Once you have your Sphere in place and have a fair definition of your strengths and weaknesses you need to study different neighborhoods and trends. You can take your Realtor’s word for it on this subject, but I think this is an area that you should do your own research as well. My rules to picking an area to invest in are simple. Pick an area that is close-by, within 2 hour of your home. The further away the less likely you will be to be able to go work for short periods of time and you will be a lot more likely to go work on it if you are closer. No one wants to drive long distances to go and work.

The next rule is have an exit strategy. If you aren’t prepared to sell or rent the property before you buy it don’t buy it! I have seen a number of investors go in and do a fantastic job of rehabbing an old run-down house. When its time to sell they find out the hard way that no one is willing to pay the price they need to make a profit. If you need to sell your property for $220,000 to make a profit and all of the other homes in the area sell for under $200,000 you are going to have a tough time finding anyone that will look at the property. They’ll often say “I like the house, but I don’t like the neighborhood.” Its because buyer will expect a better neighborhood for that price. Try to attract buyers to the home by advertising before you have the home complete, but don’t let them see it until it is done. Almost everyone that I have ever met cannot see past the mess of a remodel and picture the final product. Don’t waste potential buyers make them wait until you are done with your work.

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