10 Tips for Better Flips
Don't make the 10 common rookie mistakes that could cut your career short.
Rehabbing investment property is often romanticized. Buying a broken down property, investing time and money into it, flipping the property as an improved and beautiful home, and walking away with a handsome profit is one of the most glamorous dreams of many would-be real estate investors.
But don’t be fooled. There’s a lot to learn about real estate rehabbing before you dive into your first property. Being a good real estate investor and being a good rehabber aren’t the same thing.
So, here are 10 things we believe every real estate investor should know about rehabbing investment real estate.
#1 Investment Properties are Not Your Home
Remember, real estate investing is a business. Investment properties that you buy and sell are not your home.
Every property you buy to rehab needs to turn a profit, and every decision you make about rehabbing the property needs to be about profit margins. If you don’t think this way, you won’t see a reasonable return on your investment, and your career in real estate will be short lived.
#2 Most People Can’t Rehab a Property Alone
Even a general contractor will probably use subcontractors to do portions of a rehab. So even if you are the most talented DIY person in the world, you’ll probably want help rehabbing your investment property, if only for the sake of speed and efficiency.
Good rehabbing projects rely on experienced contractors, who can get the job done quickly and efficiently.
In addition to contractors, you’ll want to use a lawyer for permitting and legal questions, and an accountant to make sure you receive all possible tax breaks.
Doing all the rehab work yourself is not only impractical, it becomes foolish at some point.
#3 Rehab Budget
Never buy a property without estimating the repairs with your contractor, and never start a rehab without a budget.
Leave room in the budget for unknowns and overages, and then work to hold the project as close to budget as possible without sacrificing profit.
#4 Working With the Right Contractor Adds Profit
Trying to save money by using a cheap or inexperienced contractor often results in disaster, and takes away from your profit.
Cheap contractors make lofty promises, but they’ll rarely be the most cost-effective choice in the long run. A reputable, experienced, and licensed contractor that costs a little more will usually add to the profitability of your rehab, while efficiently producing a higher quality of work. And, this type of contractor is likely to have subcontractors that produce the same high-quality work, all of which contribute to finishing the rehab more quickly and adding to your long-term profitability.
#5 Check for Permits
Two of the worst things that can happen to an investor revolve around permitting:
Not checking permits for additions to the property by a previous owner may result in not being able to sell the property.
Not having permits before starting a rehab may result in work stoppage by authorities, delaying the project and significantly raising costs.
New investors especially run into problems with permitting, mostly because they do not know the local laws.
As an investor, investigate possible permitting issues prior to purchasing an investment property, or at least make your purchase offer with knowledge of the possible issues that could exist.
Also, never begin work on a property until all permitting is complete. If you allow work to begin without the proper permits, the permitting process can be much more costly and time consuming, including fines that must paid before work continues.
#6 Know When to Advertise
Some investors advertise a flip or a rental early, but don’t “put up the sign” until improvements are completely done, and the home is staged. Other investors advertise early and let prospective buyers tour the home and have input regarding the renovation.
Whatever works for an investor to maximize profits is the best way to handle the advertising of his investment property.
But one thing is for certain, networking and having a mailing list of agents, buyers and/or renters who are interested in an investor’s properties is the most efficient way to advertise.
With any business, insurance against loss is important, but especially when you have people working on your property with dangerous equipment.
When rehabbing investment property you want to ensure that you’re adequately insured, so you’ll probably want to consult your attorney to make sure all your bases are covered. Furthermore, you’ll want procedures in place to ensure that contractors have up to date licenses and insurance.
Types of insurance you might carry may include fire, theft, and flood insurance for investment property, landlord liability insurance, and health insurance for employees.
#8 Plan for Seasoning
“Seasoning” is the time a property has been owned. This is an important factor because mortgage lenders will not loan money for properties that do not meet their seasoning requirements.
For example, if you buy an investment property with hard money, rehab it and put in on the rental market, you will not be able to apply for a lower interest rate loan from a traditional lender until the seasoning period is satisfied. In the mean time, you will pay a higher interest rate with the hard money loan, perhaps for even a year.
And if you are flipping investment property, be aware that some buyers may not qualify for a mortgage based on seasoning requirements from lenders, which could result is holding the property for a period of time.
So before purchasing investment property, have a clear understanding and plan of how to deal with seasoning. Know lender requirements regarding seasoning, and have a good relationship with a mortgage broker who works with lenders that have favorable seasoning requirements.
#9 Stay Flexible
No matter how well you plan, and how well you account for every possible obstacle, things will go wrong. Even with contingent plans in place, you’ll still have to make changes on the fly. So expect to solve unexpected problems on a moments notice, and develop the knowledge to make snap decisions that will keep the rehab moving forward.
As discussed already, using a reputable and experienced contractor will help immensely when problems arise. An experienced contractor deals with problems all the time, and possess the knowledge that can identify possible solutions and solve the problem. You will pay a little more to use a quality contractor and qualify subs, but you’ll be monetarily rewarded in the end for choosing quality over saving a few dollars.
#10 Rehabbing Isn’t Easy
There’s a reason experienced investors use quality professionals to find, buy, rehab, and sell or rent out their investment properties.
Rehabbing investment properties and bringing them to market isn’t easy. Besides the ability to fix the physical dwelling, there are legal requirements that must be met, and unforeseen challenges that must be overcome.
If you want to sleep better at night, have a happier life, and make more money, do what successful real estate investment companies do, use professionals to do the rehab.