That’s why we’ve put together this list of the Top Six Things NOT to Do in Real Estate Rehab Investing:
What NOT to do (in real estate investing)
1. Don’t act without a strategy. One of the biggest mistakes new real estate investors make is not having an investment strategy in place. An investment strategy is a model outlining the types of projects you’ll be undertaking (rehab, rental, etc.), their scope and structure.
Oftentimes, an investor will fall in love with a particular property, make the acquisition, and then attempt to build a strategy that centers on that individual property—wrong. The strategy must come first, then you find the property that will work with the strategy—it’s not the other way around.
When it comes to designing your strategy, there is no perfect one-size-fits-all solution. You must choose a plan that fits your unique strengths and weaknesses and aligns with your particular investment goals.
2. Don’t use the wrong kind of financing. Not having enough money to put into the property is another common error investors make during their first acquisitions. That’s why financing is so important.
You want to make sure that the type of financing you pursue is well suited to you, and your project. Are you going with a conventional bank loan, hard money, or something newer and more alternative? Is the loan based on the purchase price or the value of the property after repair (ARV)? What is the interest rate? Is it a short-term or long-term loan? What are the credit and income requirements? These are all components that change depending on the type of financing you use, and they factor prominently into your ability to see the project through, as well as what you walk away with in the end.
3. Don’t settle for a lousy location. The mantra of real estate investing is, “location, location, location”—keep repeating it, it’s that important. For newcomers to the playing field, it’s better to pay a bit more for a property in a good location than to pay bargain basement prices for a similar property in a lousy one—a common mistake for rookies.
What makes a good location? Proximity to amenities such as grocery stores and other retail spaces, schools, parks, and libraries; accessibility to major highways and routes (think, easy commute); and the overall appearance, are all key factors. Whatever you do, don’t condemn your investment career from the beginning by making a hasty decision when it comes to location—there’ll be other opportunities.
4. Don’t lowball the cost of repairs. Before you dip your toe into house flipping, spend some time researching the average costs of repairs such as a new roof, replacement windows, heating and air conditioning maintenance, exterior paint job or new siding, hot water heater repair or replacement, and mold removal—and that’s just a handful of possible problems.
Create a budget repair sheet and do a walk-through with a general contractor prior to initiating work. This will help you to estimate the cost. Knowing which repairs are absolutely necessary and which can be cut can save you a lot of headaches and money. Be sure to seek out investors or contractors with more experience and knowledge than you have to ask for help—compensating them for their time and knowledge.
You can meet other real estate investors by networking locally, or online through sites like BiggerPockets.
5. Don’t pick crummy contractors. Of course the more sweat equity you can put into the property yourself, the higher your profit margin. But if the skills you bring to the table are limited, or like many of us, you can’t swing a hammer without nursing a swollen thumb afterward, then contractors it is.
Good contractors are worth their weight in gold. They work hard and do the job right, complete their work on time, clean up when they’re done, charge prices that won’t leave your jaw hanging on the floor, and they’re licensed, bonded, and insured. If you don’t perform your due diligence to find dependable contractors upfront, the decision could cost you big-time when the final tallies are in.
6. Don’t skimp on time. Knowing how long a rehab project is going to take isn’t a skill you start with—it’s an art you develop over time as you build experience. That’s why, until you’re seasoned in the business, it’s a good idea to double your time estimate. Real estate investment is all about time: time to find a property, to close, to renovate, to fix whatever doesn’t pass inspection, to show the property, and finally, time to sell. That’s a lot of time for something to go wrong—and you’ll be very lucky if it’s just one thing. So when you plan your initial strategy, don’t underestimate the time it will take.
According to Warren Buffett, “Games are won by players who focus on the playing field—not by those whose eyes are glued to the scoreboard.”
Any way you look at it, house flipping is a rewarding, but demanding, endeavor—not to be undertaken lightly. To come out on top you’ll need to focus like never before. Once you leave the starting gate with your first project, your full attention should be devoted to each task at hand until you cross the finish line. Only then will you be able to claim victory.
Begin by building your house flipping business on a solid foundation. The following pointers will tell you how.
House Flipping Basics for the Novice
Do your homework. Before you dive headlong into house flipping, it’s essential to spend some time researching it. House flipping is a multifaceted undertaking and you’ll never know it all, but to attempt to do it without some due diligence on the education front would be disastrous, not to mention just plain foolish. You don’t need to spend thousands on online courses, but you do need to do some reading. The Book on Flipping Houses by J Scott is a great place to start. Once you’ve thoroughly absorbed that one, try these other recommendations from Modest Money.
Of course reading books by the experts is only one way to learn. Do you have any friends or family that have experience with house flipping? If so, don’t let a resource go to waste—ask them about their experiences, their successes, and what they wished they’d done differently. Better yet, see if you can mentor under them.
Lastly, there are tons of free videos and podcasts online with useful information such as this podcast from BiggerPockets—just be sure not to get caught up in misleading reality TV shows.
Master the math. Don’t let the manual labor fool you—at the end of the day, house flipping all comes down to a numbers game. If you don’t roll up your sleeves and dig into the math on the front end, you could find yourself in a money pit further down the road. Luckily, you don’t have to be a rocket scientist to flip houses. The math is simple and straightforward—fifth grade level.
The first—and most important—equation to learn is “The 70% Rule.” This formula tells you the maximum price you can purchase a particular property for, and still be able to sell it for a profit—the Maximum Allowable Offer (MAO). To do this equation you have to know the after repair value (ARV) of the property. This amount, usually determined by your real estate agent, is an estimate of how much a particular property will sell for, once all the repairs and renovations have been completed. Once you’ve established the ARV, multiply it by 70%, and then subtract the anticipated cost for repairs. The answer is your target purchase price—don’t pay above this amount. Of course there are some exceptions to the 70% rule.
Know your market. Flipping a house is a lot of work and you’re going to be there nearly every day until it sells. That’s why it’s important that the house you purchase is fairly close to where you live—eliminating the extra wear of a long drive at the end of a hard day’s work. For this reason, it’s vitally important to know your local market, your town, city, or area. Check out what properties are selling for and how long it’s taking for them to sell. When considering a specific property, ask questions like: Is there a school nearby? How about amenities such as parks, grocery stores, and libraries? What are the demographics of the area? All of these things can help you determine your profit margin.
Assemble a solid team of contractors. It may take some time, but if you’re going to be in this business for the long haul and you’re not doing the hard labor yourself, you’ll need to build a team of contractors that are dependable and trustworthy. Of course, this is easier said than done—quality work for a reasonable price is a rare commodity. By far the best way to find these individuals is to get a referral from other investors you know. Don’t rely solely on someone else’s word though, be sure to shop around for multiple bids—weighing price against reputation. The contractors you hire should be licensed, bonded, and insured. When negotiating the cost of a job, ask questions, be specific about what is included and not included in the work, and get it in writing.
Be patient. Rome wasn’t built in a day—neither is a house flipping business. Although time is of the essence when it comes to profit, don’t rush through your first house flipping venture, purchasing an overvalued property, allowing shoddy workmanship on the rehab, and selling to the first buyer who makes an offer, out of fear. Give yourself the time and space to make thoughtful decisions. And cut yourself some slack when something doesn’t go as planned. House flipping is all about the unexpected—but with flexibility and persistence, the patient investor will find his, or her, way through the obstacles.
As with most things in life, although there isn’t one single path to beginning a successful house flipping business, what you put into it corresponds to what you get out of it. Or, as the financial analyst and advisor, Paul Clitheroe, said, “Invest in yourself. Your career is the engine of your wealth.”
Dipping your toe into the house flipping business? AssetAvenue offers rehab loans from $150k to $2M. For more details, or to get an instant quote, click here.
The most important question you need to ask yourself is do you want to be a landlord?
The day-to-day management of owning a rental property is a big role. Being a landlord takes patience, flexibility, strong resolve when enforcing rules, and a long fuse. Disagreements between tenants, tenants that won’t pay, unexpected and costly repairs, long vacancies—these are some of the downsides of owning a rental property. Although it can be a dream come true for some—and if done right, it really can provide that additional avenue of income you’re looking for—it’s not for everyone.
Here are some things you should know to help you decide if it’s for you:
1. It’s not easy money. Investing in a rental property is often put in the easy money or get-rich-quick scheme category, but the truth is it’s no walk in the park. Although it technically qualifies as passive income, that doesn’t mean you’re not going to work hard. In fact, if you decide to manage the property yourself, it’s akin to taking on a second job. If you’re looking for something more hands-off, stick with stocks or mutual funds.
2. There are no guarantees. Not only is owning/managing a rental property not easy money, there’s no guarantee that you’ll even make money—it’s risky. With a fluctuating, and often unpredictable, market, as well as lots of hidden costs lurking around every corner, you really need to ask yourself is it worth the risk? As you’re considering each potential property, never forget that the reason you’re investing in rental property to begin with is to gain income. Weigh everything carefully and always ask yourself, “Will this property actually generate money or is there a chance it might be a money pit?”
3. You need more money to get started than just the cost of the property. When investing in a rental property, the initial purchase is just the beginning. Be sure to set aside funds for other start-up costs such as renovations, repairs, and a higher property tax bill that could be double what you were previously paying. You should already have a solid income before you get started.
4. Location matters. Just any old apartment building or rental house isn’t going to fit the bill. Before you get your heart too set on a particular place, take the property’s location into serious consideration. Ask questions like is the crime rate high in the area? Are there schools close by and how are they rated? How far from basic amenities such as parks, grocery stores, and restaurants is it? Are there a lot of other rental properties in the area and, if so, what do they typically rent for?
5. Have the property inspected by a professional before you buy. A professional inspector can put your mind at ease about a purchase you’re considering, or send you running for the door—either way you’ll be thankful. For about $250 an inspector can tell you if the property has termites, crawl underneath it to examine the foundation, and see if the roof will need replacing before the next winter, and much more.
6. Expect the unexpected. Owning and managing a rental property is kind of like being the captain of a ship—you’re constantly working to maintain it and keep it heading in the right direction, and then, just when you think everything is under control, a giant storm comes out of nowhere and ruins your best laid plans. Unexpected (and often costly) issues can and will arise with rentals—everything from clogged toilets, flooded basements, and burst water heaters, to disgruntled tenants refusing to pay before skipping town.
7. Renters can do a lot of damage. We all know the famous hell hath no fury like a woman scorned, but what landlords come to find out is that disgruntled tenants are next on that list. Until you’ve been victimized in this way, it’s hard to imagine the amount of havoc an unhappy renter can wreak upon a property. Damage can include graffiti on the walls, concrete in the toilets and sinks, ripped or stained rugs, broken windows, nails or hammer marks in the floors, missing doors, and any other damaging mischief your angry tenant can dream up.
8. A good renter is worth holding out for. Having one bad renter will make you appreciate the good ones. In the long run, it’s worth a little extra time and a more rigorous screening process to find these diamonds in the rough. Good renters pay on time, take pride in their home and yard by keeping everything clean and in good working order, treating the property like their own, and being respectful of neighbors. These types of tenants generally stay longer, too.
9. There are pros and cons to hiring an outside manager. Okay, so you’ve figured it out. You’ll just hire someone else to manage the day-to-day minutiae of the property. While this can save you a lot of the hands-on work and the headaches that go with it, you’ll also be losing about 10 percent of the rents to pay for this service—nothing to scoff at. Furthermore, you’d be putting yourself in a situation where you have less knowledge of what’s actually going on with the property—a decision that could come back to haunt you further down the road. If you do intend to hire someone, you should at least plan on being there in the beginning, to make sure the tenants are good ones and that the building is in top-notch shape.
10. It’s better to be hard and fast with the rules. Being a landlord is not for the faint-hearted. Although you may feel good about providing a place for people to live, if your renters don’t pay on time, or they’re causing trouble, you can’t be wishy-washy about enforcing the rules, or show any sign of weakness. It’s much better to assert yourself right away—otherwise you may find your tenants taking advantage of you.
With a little forethought and some careful planning you can make your rental property investment the success of your dreams.
Why Insurance is Key?
Every dollar an investor spends fixing up a house they’ll soon be flipping cuts into their profit margin. Which is why every renovation they make should both add value and be as cost efficient as possible, protecting their end investment. In fact, one of the most important parts of rehabbing a property is protecting their very valuable asset from further damage.
Savvy real estate investors know that it’s best to employ a multi-pronged strategy to protect their profit including, everything from accurate sales comparables, to vetting and hiring trustworthy contractors, to making sure they’ve got the proper insurance and even that they have a solid exit strategy, should one become necessary.
Reminding your investment real estate clients about being properly insured during a rehab can be one of the easiest ways to ingratiate yourself to your client long-term, showing them that care about helping them preserve their investment. Having the right insurance in place on a rehab allows your investor to protect their assets in case of natural disasters like fires, storms, and floods in addition to other unforeseen damages like those caused by theft or vandalism.
What Type of insurance Do Rehab Investors Need?
If you’ve got an investor renovating a property for resale, it’s a pretty sure bet they won’t be living there. Vacant homes present many opportunities for investment loss. Which is why it’s so important for investors to look into the right policy for their circumstances BEFORE they complete their purchase.
Things to consider include:
- Will insurance need to be in effect prior to closing?
- Will the property be completely vacant or will there be furnishings or other staging equipment or property stored on the premises? Is the property located in a high-risk area?
Types of Insurance available for real estate investors and landlords:
- Hazard and Fire Insurance
- Liability Insurance
- Sewer Backup Insurance
- Flood Insurance (Only necessary if the property is in a designated flood zone or an area that has a propensity to flood.)
- Builder’s Risk Insurance (the most likely for a real estate rehab investor needed for vacant or mostly vacant properties that are being renovated the property.)
- Loss of Income Insurance (Necessary for landlord/investment property owners that you are renting to tenants.)
- General Contractor Insurance (Applicable if your investor is also a licensed contractor.)
- Umbrella Insurance Policy (Good extra liability coverage for a variety of situations.)
Refer Clients to Qualified Insurance Agent
While the list above presents a wide array of potential insurance types for real estate investors, depending on your clients’ circumstances, additional policies may be needed. This is why it’s important to direct your real estate investment clientele to a knowledgeable and trustworthy agent who specializes in working with landlords or fix-and-flip investors.
Even if a Builder’s Risk policy is most likely a fit for your rehab investor, it’s a good idea to have them check with their agent before purchasing or starting renovations on a rehab property to make sure that the property is insurable. Some high-risk areas, those subject to repeated flooding, natural disasters, rough areas, etc. may be difficult to find someone to insure. It’s a good idea for your investor to know what they’re up against before buying a property.
What’s a Builder’s Risk Policy?
A Builder’s Risk policy is specifically designed to meet the unique challenges and exposures posed by an unoccupied structure undergoing renovation. It takes into consideration the continuous change in property value, as it undergoes its transformation, and it’s completed value.
Builder’s risk policies can include:
- Property purchase price
- Improvement costs and can include such things as materials, supplies and fixtures including those in transit and stored at a temporary locations.
- Multiple insurable interests including the owner, contractor and lender
Above all else, successful real estate investors are passionate about what they do. With the staggering outlay in time and money that investing demands, it’s passion that carries an investor through the late nights when the market is ripe, as well as through the everyday grind when business is slow. Although many can enjoy a taste of short-term success, only the few who passionately love what they do will persevere in the long run.
A great real estate investor doesn’t give up—they’re tenacious. A combination of drive and optimism allows these successful investors to keep trying, showing up every day, even when the chips are down. Taking no for an answer, is a concept they don’t understand. If one door won’t open, they look for another way in. You’ll never find a successful real estate investor crying in his, or her, beer.
Because the workload is substantial—with an extensive variety of tasks to juggle—it’s vital to an investor’s success to be disciplined, not only with regard to their profession, but all aspects of their life. Many successful real estate investors simplify their lives to the basics. They follow a routine. They wake early, eager to dive in. They are methodical in their approach to business and know how to prioritize.
To be a successful real estate investor, you must use your imagination. What looks like a dilapidated shack to the average person, may look like the groundwork for a three-story apartment building to an investor—if they have vision. They don’t see what is; they see what could be. To have vision means to see a project’s potential for the future.
- Confidence (without ego)
Although a great real estate investor will temper their optimism with a touch of realism, there’s no room for doubt when it comes to decision-making. If you want to be successful in this arena, you’ve got to be confident. If you don’t trust your own judgment, than you can’t expect those around you to place their trust in you either. On the other hand, a successful entrepreneur knows that ego can be their ruin. Therefore, a savvy investor knows they must walk a tightrope of confidence without ego—showing what they’re capable of through action rather than by talking a big game.
- A sense of timing
The real estate market is fickle and fraught with unexpected twists, turns, ups and downs. Knowing when to strike—like a cobra—requires patience, poise, and an impeccable sense of timing. The successful ones trust their gut. This ties in with having discipline—knowing when to hold back, lie in wait, and then intuitively knowing when to say, now is the time to act.
- Knowledge of people
There are very few things in this world that you can do entirely on your own, and investing in real estate is certainly not one of them. From buyers to developers to builders to bankers, a successful real estate investor knows who they’re dealing with, what their best interests are, and how to communicate with them straightforwardly and authentically. The greats surround themselves with other greats—like-minded individuals that value the same things as they all work together toward a common goal.
Investment comes with its share of uncertainty, and with uncertainty comes risk. A great real estate investor takes this in stride and doesn’t allow fear to overtake them—their spirit is indomitable. They know they must act boldly, but this doesn’t mean saying yes to anything and everything that comes down the pike. Those who are successful in the field know when to step out on the ledge, and they possess the firmness of character not to get blown away. Their risks are calculated, not foolhardy. If you have grit, you can make a bold, risky move, knowing you’ll be okay regardless of the outcome.
As the American entrepreneur, Robert Arnott, once said, “In investing, what is comfortable is rarely profitable.” In one sense, the business of a real estate investor is slow, broad, and long, and in another it is life on the edge. Investing can be cold, hard, and frustrating at times. It requires a special kind of personality to hack it. To wake each day and be your best self— in business and in life—is the true key to long-term success.