Here’s the facts — most first time flippers tend to over-improve their properties. That means, they’re dumping way more time and money into those flips — time and money they’ll never recoup.
In today’s episode, I’ll show you how to limit your rehabs to the perfect amount of upgrades and fixes — leaving you more profit because, let’s face it, you can get the same amount of profit, with less investment, if you do it right.
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One of the most common beginner mistakes in the rehab business, is over-improving their first property. It’s a hard lesson to learn but usually that first property is an eye-opener.
Those quixotic ideas like, “Let’s put in a pond with a fountain and this baby will sell like free bacon!”, quickly fall apart at the negotiation table when you realize that extra $5,000 spent beautifying your first distressed property, isn’t going to have a positive effect on your sale price after all.
The key here is, to focus on the major issues, and don’t sweat the small stuff.
To do that, let’s actually take a look at the project, in reverse.
One of the most common strategies used by flippers is the BRRRR method — Buy, rehab, rent, refinance, and repeat. The problem is, the end goal — repeat — is the last item on the list, meaning, it’s the last thing you’re thinking about when you setout on this new adventure.
So what I’d like you to do is, put ‘repeat’ in the forefront. The ultimate goal for you is to be able to do what you do, again and again — growing your real estate empire with an easily duplicatable system.
By itself, that concept should help reduce the tendency to over-improve because you’ll stop looking at properties through an individualized rose-colored lens.
If you can start to look at properties from the standpoint of easy replication, you’ll reduce your risk and streamline the whole process.
Some people don’t like the business aspect of flipping. But the truth is, profitable rehabbing isn’t all about finding the perfect distressed deal, or being able to complete excellent improvements. The business side of things is just as important — if not more.
Before you buy your first project, it’s a good idea to talk to a lender and workout some of the details ahead of time, for what will happen after the project is completed.
Once your business grows, you’ll be working with your lender frequently (that’s the dream anyhow), so you want to find a lender that can provide you with competitive contracts — and one who knows what you’re up to and can accommodate a profitable refi.
Once your project is completed and you’ve got a renter in place, you’ll want to refinance your initial loan to reduce your monthly expenses — and increase your monthly profitability.
Ask prospective lenders about requirements or challenges that may come up once you’re ready to refi. For example, do they have square-footage minimums? What debt-to-income ratio will they work with?
You can even go so far as to submit your financial and credit information so that they let you know if there are any possible pitfalls. There aren’t many things more discouraging than finishing a rehab project, just to find out that you don’t qualify for a refi.
Let’s talk ARV. I can’t tell you how many would-be flippers start a project by dreaming about how much more valuable their pet-property is going to be, with the improvements they intend to do — only to find out that no other comps in their neighborhood are even close.
It’s very difficult to blow through that ARV ceiling when all the other houses in the area, can’t compare. So you need a realistic expectation at the outset.
Getting the ARV wrong means you’ll risk dumping more cash into improvements, which is going to hurt big time when you refi.
Of course, getting comps from a realtor is a great starting place — but don’t put all your eggs in one basket. Remember, a realtor can make money off the deal whether you do or not. At the very least, get comps from a few sources so you can come up with a reasonable and accurate ARV.
What Will It Rent For?
Sometimes new investors get caught up in trying to make the world a better place, by improving their properties to the same level as ‘the nice part of town’. And I won’t argue that turning a dump into a mansion is an adrenaline rush — hell, just knowing that you can do it is a temptation that’s hard to ignore.
The problem is, if all the houses for 10 blocks are renting in the $1,200 – $1,500 range — you’re not going to get $2,500 a month no matter how much work you do. Sure, you can shoot for the high-end range, but don’t make the attempt to raise the rent ceiling for the neighborhood.
One simple strategy is to take a ride through the neighborhood and take pictures of the typical houses you see. If you’re going to do the work yourself, use those pictures as reference when you start to plan improvements. If you’re working with a contractor, give them the pictures and tell them that’s what you want.
Using this strategy you can find a distressed property in the area, and take it up to the average level of other rentals in the neighborhood— which means you’ll do just enough improvements to make it marketable.
Understand, I’m not talking about just doing the bare minimum and creating a slum-lord business. You might find a property that can benefit from converting a half-bath into a full-bath. Maybe you can open up the kitchen to make the dining room feel bigger? The point is, only make improvements that will bring the house to comparable rent levels.
If you’re not already working with a Project Manager, talk to them about rents in the area — they could gain a client and you could gain valuable knowledge that will keep you from taking a huge financial risk.
I know, it takes some legwork but this is what separates top-tier investors from would-be amateurs. Instead of letting your emotions dictate what work needs to be done, let the market tell you. And I know, if you’re creative and skilled at what you do, it’s hard to push those inclinations down — but the market doesn’t care about your feelings or your pride.
What I tell people is, you need a strong base of responsible flips, first. Then, when you’ve got a few hundred thousand dollars laying around, go ahead and show the world what you can really do.
Now It’s Time To Buy
Once you’ve done all the research, then you’re ready to make an offer. Having a realistic expectation of rent value and average market ARV, you’ll have the data to give your contractor (or put together a budget if you’re doing the work yourself) so you’ll know how much wiggle room you’ve got. That tells you what you can offer.
If you’re wanting to build a successful rehab business, you quickly realize it’s not all about finding the perfect distressed property and working your magic. The business side of things is much more important and you should let the money dictate which properties you’re willing to look at, and how much you’re willing to invest.
There’s a vast difference between investment houses and dream homes. As an investor, you buy houses. Don’t become personally attached to properties or make emotional decisions — that’s bad business. Save your creativity for your dream home and apply sound financial strategies to your real estate investments.
I’m Ken Walker, on behalf of the Poston Investment Collective, thanks for stopping by and make sure you subscribe to our OPM Secrets Webinar series, you’ll discover ways to grow your real estate business with investment opportunities and proven real estate investment strategies.