ARE YOU CUT OUT TO BUY A FIXER UPPER?
So You Want to be a Real Estate Flipper
“If people are unforgiving up front about assessing the costs of renovation, the value of the property and the neighborhood, and how much money they have, they can come out ahead and buy more house than they otherwise could ever afford,” says Bradley Inman, CEO of HomeGain.com, a real estate sales and information Web site. (as quoted on thisoldhouse.com)
The lure of real estate investing is great. This article outlines what it takes to buy, renovate, and resell real estate. Find out if this potentially lucrative endeavor is for you. Consider investing $125,000 for a run down home in a nice neighborhood. Next, invest $10,000 in cosmetic updates; clean up the yard and plant some flowers, paint the front door, give the inside new paint, carpeting, and upgrade the kitchen counter tops. Allow another $10,000 for fees, inspections, holding costs, and real estate commissions. Turn around and sell the house for $175,000. Add $20,000 to initial price of $125,000 for an investment of $145,000, subtract sales price of $175,000 for a 20 percent return of $30,000 profit. Sounds like a great deal!
Wait, the entire project is fraught with challenges and may not pan out as expected. Do your homework and to increase your chances of success.
My Real Estate Cred
Mom and dad started out poor and built wealth through entrepreneurship. Although involved in several businesses throughout their lives, the longest lasting was a real estate business based on buying poor condition homes, renovating, and reselling them. Today, it’s called “flipping”. Our Sunday’s were spent driving around looking at real estate. At age 22 my dad said, I’m going to teach you how to renovate and proceeded to take me on as a partner in renovating my first real estate property. Over time, I bought houses at sheriff sales, evicted bad tenants, bought dilapidated buildings and renovated them. With today’s low interest rates, if you have access to a bit of capital, time, and a hunger to get your hands dirty, this is a superb road to wealth.
Do Your Research First
Research and access to capital are the cornerstones of success.
Take a personal inventory; Do you have the qualities to succeed?
Discretionary time each week to allot to the real estate. You need to be willing to problem solve, have extra time and a flexible schedule, as issues come up at odd times, and be in it for the long haul. Once you commit, it’s difficult to get out.
Enough access to cash for a down payment, remodeling expenses, and cash to carry you when things go wrong. Savings are a good place to start, credit cards, and a home equity line of credit are other options. When buying real estate, you can potentially use funds from a mortgage or renovation loan. Be careful not to borrow more than you can pay back within six months or so, otherwise, your interest charges can easily eat up the profits.
Learn the pricing in your desired market. Zillow is a great resource for sold statistics. Realtor.com is another one for current data about properties on the market. Also factor in “days on the market” to project time to sell your renovated property.
Skills to analyze the income, expenses, and cash flow of rental property. Quite simply, calculate the purchase price (don’t forget to include appraisals, inspections, and closing fees), add in renovation expenses (then add about 25 percent extra for unexpected costs). Add in a few months of holding costs to your expenses in case the property doesn’t sell right away. Subtract all of the projected costs from the expected sales price (don’t forget to include a real estate commission). Personally, I wouldn’t touch a project for less than a 20 to 30 percent projected return.
Attention to detail. Spend time researching contractor pricing in your area. It’s cheaper to renovate in Kentucky than California. Know your market. Know loan rates and availability and make sure you can get credit before taking the plunge.
Stick to cosmetic repairs initially. In the beginning, it’s much easier and less expensive to change out carpets, paint, replace a few light and bathroom fixtures, and small electrical fixes. Once you get into plumbing, heating, air conditioning and major systems the dollars and problems add up fast. Build up to larger renovations as your experience improves.
In “My Landlord? Henry Kravis”, Bloomsberg Businessweek, July 30, 2012 relates how the big players are having trouble managing their low cost real estate portfolios. Go into the endeavor with facts in hand and eye’s wide open.
Have you considered investing in real estate? What is your real estate advice?