Most real estate investors start their career with simple rehabs. Many homeowner hear the horror stories of rehabs and automatically steer clear of any rehabilitation projects. Unfortunately many homeowners leave great opportunities on the table when they make this decision. Imagine if you could live in a better neighborhood, with better school districts, shopping, and other nice amenities. You can achieve this by simply opening your mind to rehab opportunities.
Find a Property with Rehab Potential
Get a real estate agent that has experience buying and selling rehab properties. If you have never done a rehab before, it will be very hard to distinguish between what is a great candidate for a rehab and what really just needs to be torn down. You would be surprised at the subtle differences. As a rule of thumb avoid properties with any foundation damage or needing repairs of over half their value. If you are purchasing a house for $200,000, watch out if the house needs more than $100,000 of repairs.
If you are a beginner, try to keep it to 25% of the value of the house. The reasoning here is twofold. First, the more repairs that need to be done, the more likely there are additional repairs that you don’t see. This can be devastating if not budgeted for. More importantly, you want to make sure you are adding value. The more repairs that need to be done, the deeper the discount of a property. This does not just mean the property should be the same price minus repairs. There should be an additional discount because of the risks involved in doing a rehab.
Quantify the Rehab Opportunity
Once you find the desired neighborhood, you need to look for houses on the lowest end. As you look for these opportunities, you need to have on your rosiest colored glasses. Try to put everything in a financial context. If the front lawn looks overgrown and the screen door is falling off, remember that can all be fixed for less than $100. Don’t let little things force you away from a great opportunity. It’s ok if there is a leaky roof or multiple holes in the walls. These all can be repaired for a few thousand dollars. Watch out for things like cracks in the basement walls, cracks in the foundation, buckled floors, or outdated electrical systems. These can all be very big ticket items and an issue of personal safety. Leave these opportunities to the hardcore rehabbers. Remember, your agent is here to assist you in every aspect of purchasing your home. He/She should be able to give you an estimate of how much potential repairs should cost and refer you to people who can perform those repairs.
Advice for Rehabbers who Live-In
If you plan to live in the house while you are doing repairs avoid rehabs that will make this very uncomfortable. If the house has multiple broken windows and it’s a cold winter, avoid it unless you can get this fixed right away. As you are doing a rehab, consider fixing up the basement and using that as your home base until repairs are done. This may not be optimal, but it will probably be preferable to inhaling dust and other bits as your new dream house is created. Most rehabs go over budget and over time, so don’t be disappointed if you have to spend an extra month or two in an uncomfortable situation. It helps to put a few pictures of the finished product around your cozy living space. Some times this may be the only thing keeping you sane.
Finally, don’t overlook older out dated houses. These may be great opportunities as well. Modernizing one of these houses can net you a solid profit and give you the potential to make a house your own. Many rehabbers only look for beat up houses, but rehabs can come in all shapes and sizes. Don’t make the mistake of thinking one will be easier than the other. Older houses tend to have a lot of hidden issues that can double or triple your expected budget, so watch out.
Rehabs provide great opportunities for buyers to get into better neighborhoods. These opportunities are not for everyone because they take time, patience, and good vision. Before you undertake a rehab, make sure you have good people working for you every step of the way. A good real estate agent and a good work crew can make this process easier (not easy). Always expect the unexpected and budget at least 25% more than the expected cost of everything. Take your time and make sure you are working at a pace that fits your budget (a rehabber’s nightmare is running out of money). With all that in mind, good luck (hopefully you wont need it ).
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