Rehabbing properties can be a very rewarding or frustrating experience,
depending on how much due diligence you do and making sure you
know what you are getting into. Television shows like “Flip
This House” on AETV and “Flip
That House” on Discovery make it seem that anyone can
do this and make a ton of cash by rehabbing one property. While
this may be the case in the booming areas of California, it is
not necessarily the same here in the Midwest.
When purchasing a property to renovate, the first thing to consider is
the purchase price and the ARV (After Repaired Value). Knowing these
two numbers from the start can save a lot of heartache.
The next thing to consider is the current state of the property and how
much you will need to spend on repairs, landscaping, and remodeling.
Finally, take a look at the neighborhood. Look at the average time on
market for homes in the area.
For simplicity, lets say you can purchase a property for $100,000 and
the ARV is $150,000. The property needs some landscaping, paint, roof,
furnace, flooring, and a complete remodel of the bath and kitchen, including
appliances. It will take 30 days to have all of the work completed, and
will cost $25,000. The average time on market for properties in the area
is 90 days. Lets also assume that we are putting 20% down and financing
the remaining 80% at an interest rate of 7%.
So far it would seem that we are going to make about $25k in four months
by turning this property. Not bad. But, if we really hope to sell the
property in the average time, we are going to need a Realtor to list
it, market it, and get buyers interested in the property. Realtors like
to get paid for this stuff, so lets figure that they are going to take
7% of the sale price. There is $10, 500 off the top. The bank that financed
the project likes those regular monthly payments, so there goes another
$900 per month (PITI) times four months for $3600. We will probably need
utilities while the property is being renovated, so lets say that comes
to $1600.
Now, from the $25k we thought we were going to make, we are down to $8,400.
Still not too bad. But for every month past our 4 month goal, it could
cost about $1,300. After a couple of months, you may start rethinking
why you are doing this.
Also, be aware of capital gains taxes, which the government may
collect. Check with an accountant to see how this will affect your
bottom line.
I am not trying to say that rehabbing homes is a bad thing, I
picture the above as a worst case type of scenario. The point I
am trying to make is to be sure to know your numbers, costs, and
timing.
There are people all over the country that are renovating homes and making
a very good living doing so, but by setting the proper expectations,
you will have a much better chance of succeeding.
When you are looking for a property to flip:
• Get to know Realtors that specialize in foreclosed properties and make
sure that you are the first call that they make when something with potential
comes on the market.
• Look for bank owned properties and try to negotiate a short sale.
• Have a Realtor look for “fixers” for you
• Look for properties going up on a Sheriffs Auction
• Look for properties with room to add an addition on to the house or convert
an attic into living quarters.
• Look for properties that do not have a garage, but have the lot space
for one.
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