Rehabbing houses is an investment strategy that combines construction, finance, home maintenance and interior design to achieve the highest return investments. It is a smart way to earn passive income and expand your investment portfolio. Rehabbing has incredible benefits, but also comes with risks. Here are six common remodeling mistakes and how to avoid them.
Incorrectly Estimating ARV
After Repair Value (ARV) is the market value of the home after your renovations. Too often house flippers spend too much time and money on the project because they miscalculate the ARV. By the time they realize they have over improved, it is too late to recoup their invested funds. Therefore, it is critical that you work with a professional Realtor, one familiar with the market, and has personal experience in investing in the area. Your Realtor can give you realistic expectations, based on accurate comps, to calculate an accurate ARV.
Not Having a “PLAN B”
Life happens. Economies change, lives change, interest rates change. Everything can change in an instant. Never paint yourself in a corner. Always have a “Plan B”, in the event the flip does not work.
Know your bottom line, the market timing, and when you need drop the price and bail.
Consider a lease option. Rent to a buyer who can provide you with a down payment lease income, and who plans to purchase the property at a later date.
Consider renting. You will receive monthly payments until the market moves up to your price.
If you think you can successfully flip a home on your own, you’re in for a big surprise. Flipping houses is like a well-oiled machine, it is a big project made up of smaller working parts. It is important to surround yourself with a solid team, including your realtor, attorney, contractors, and interior designers. Use people familiar with flipping, who can advise you on the highest returns on investment.
Being Unprepared Financially
Real estate investing is an extremely profitable adventure, and many investors start with house flipping and move to buy and hold strategies and turnkey properties. The only potential downfall is the fact that real estate is not easily liquidated. Therefore, always be prepared for surprises that take the project over budget, and for the possibility of holding the home longer than expected. You can solve the liquidity problem with equity loans or other tools, but you must be prepared.
Not Knowing the Area
Real estate is a local business. When you purchase a home to flip, you’re committing to the neighborhood and local areas as well. You need to be very familiar with the area, and all the pros and cons. Talk to the people in the area, look up school ratings and crime rates, and talk to neighbors. You may do an A+ job flipping your home, but if it’s surrounded by a dangerous area, you’ll have a hard time making your money back.
Skipping Important Upgrades
In an attempt to save money, it is always tempting to cut corners. It is a common first-timer mistake. Remodeling kitchens and upgrading bathrooms shouldn’t be done half way. These are “make it or break it” spaces for many buyers, so don’t ignore them. Don’t skimp out on quality appliances in the kitchen, and do your best to “wow” buyers with the bathrooms and master suite.
Another major mistake investors make is not making moves at all. They are scared to fail, nervous about the time commitment or wary about the financial responsibility. Although these are all valid concerns, they should not stop you from making informed decisions to move forward and jump into real estate investing when you’re ready. There are always risks, but if you can learn from the mistakes of others, you’ll be able to minimize the risks and maximize the rewards.