Pitfalls: Spending Too Much on the Rehab

I hope you went looking for some great properties that maybe no one else knows about. I always get so excited when I find a property that’s an eyesore in the neighborhood, and am able to turn it around into one of the nicest houses on the block.

In turning that property around, however, you have to be very careful not to spend too much on your project. I know everyone gets excited, but remember this is a business and you have to stick very strictly to your budget to keep your LTVs in line.

How much you spend and what you do to the house will depend on whether this is a cash flow or capital gain deal. In other words, are you planning to hold on to the house, or will you sell it as soon as your project is done? If it’s the latter, keep your ARV (the amount you paid for the house minus the estimated market value after it is repaired) around 70-75 percent max. You have to keep in mind that it’s likely you could go over budget, plus you’ll have to subtract for agency fees (if you use a real estate agent), closing fees, holding fees, etc that you will incur, if you sell it for full market value.

If you plan to hold the house for cash flow, the ARV is up to you. If it’s a house in a really high-demand area, I’ve known people to go as high as 100% (you should really do your research first and know that you can get plenty of extra cash each month to cover yourself) which I don’t really recommend. I wouldn’t go any higher than 85-90%. Your goal is to keep the equity as high as possible.

It can be tough to maintain that homeostasis of equity versus value. You’ll often get excited about the project and forget about those things. Trust me, many of us end up spending more than we think we should of in the end (but the house looks so great!).

Here’s a few tips on making sure you keep your rehab in line with your goals (you are writing out your goals, aren’t you?):

• Speak with realtors/builders/contractors/designers about what people in your market are looking for in a house.
• Kitchens and bathrooms sell the house. If they suck, your house sucks.
• There are many ways to simplify the work you do. For example, instead of buying new cabinetry, reface the old one.
• A little bit of paint goes a long way. Think bright and clean.
• Often new fixtures, doorknobs, and brighter lights will be enough to completely redo a house.
• Curb appeal. Don’t spend too much on landscaping, but if you can’t see the house or the grass isn’t cut, the house won’t sell.
• Have the house inspected if you plan to sell. Overlooking this step could cost you money when the prospective homebuyer brings in their inspector.
• Plan, plan, plan! Get a couple bids on doing the work to keep you from running into any surprises.

These are just a few tips, if anyone can think of others be sure to leave them in the comments!

Investing Fun: Searching for the right property

Last time we talked about letting the professionals help you with your rehab instead of doing all the work yourself. Today I'd like to give some tips for finding the right property.

One of my best tactics for finding deals is what I call "farming." It's really a common term among investors. But it's one of the best ways to find deals and to get familiar with your "farm," or the area where you are investing. Have you ever driven by a house and noticed the yard hadn't been cut in months, maybe windows were broken, and the owners were no where in sight? If you're like me, you get really excited to see a house like that. The owner could be a very motivated seller in disguise who for some reason just hasn't been able to or hasn't even tried to sell their property.

I love driving around my area and looking for these. It's really simple to gather a whole lot of information about the property in very little time! The first thing I do is find a neighbor-- they're never hard to find, and they're always nosier than you think-- and ask them if they know anything about the house. You'll be amazed at how much information the neighbors can give you! In a couple cases, the neighbors were able to point me towards other pre-market properties in the area that I otherwise wouldn't have been able to know about. And once, the neighbors offered me their house! You'll find a wealth of information from the neighbors.

Even if you can't find a neighbor, the Internet holds a wealth of information about properties. After I speak to the neighbors, look at the property and take some pictures (you can go ahead and be jotting down what sort of rehab work you're in for), I find somewhere with internet and jump on the county's tax assessor website to look up information about the owner, square footage, last sale date, how much they paid for the property, I can even see if they started rehab if they got a building permit. Here's what my local website looks like: Real Estate Search.

Whenever you find out who the owner is, look up their phone number on the Yellow Pages and jot that down. You want to get a gameplan together on what you think about the property. Often you'll know how motivated the seller is after you've spoken with the neighbors-- maybe a family member died, divorce, you never know. And don't be scared if the owner is another real estate investor. They may need to dump the property and haven't found a buyer yet.

Above are some houses I found while farming my area, I just snapped the pictures with my camera phone. Sometimes I find these properties by accident just by taking a different route home than usual, or I will purposefully spend time to go and look for possible deals. Remember, this is a business and spending time searching for deals is business time (and business miles to deduct from your taxes ;-) ).

Your next step is speaking with the seller and negotiating. I'll go more into negotiating in the next blog!

Pitfall: I can save loads of money by doing the rehab myself

We'll start this blog off with a common pitfall that I believe many investors realize after they start their first project: I can save loads of money by doing the rehab myself.

Yes, and no.

While it is true that by taking care of the labor yourself you will save yourself plenty of money (this is especially true for those of you who are already skilled in this area), trust me, this isn't the place or time to learn how to be a carpenter or plumber. Time is money. If you are skilled in this area, you have a definite advantage over those of us who aren't.

However, I notice people who are skilled in rehabbing want to take care of the entire project themselves. While this seems like a good idea, if you are serious about real estate investing then you should take your investing and treat it like a business. I suggest everyone read the book by Michael Gerber The E-Myth Revisited. The basic concept I'm taking from this book is as a business owner (even if you're small time, a "weekend warrior," this is BIG money and should be treated as such) you have to learn to wear all the hats of a business owner equivocally.

That means balancing the checkbook, finding new deals to work, making your exit strategy, getting marketing ready, working on your project, balancing your timebook, and making time for family, friends, and yourself. Many of you probably have another job where you work, as well. You need to do all these things equally, not too much work on the project or you'll miss out on some good deals. Not too much time finding new deals or you'll mess up your exit strategy. You see where everything's interconnected here?

You must be the manager, mechanic, and entrepreneur all at once. And the different jobs must be balanced.

People who do the work themselves usually find they spent more time on the project that what they anticipated. Especially if you're not already a professional in this area. You are a professional real estate investor.
Let the professional plumbers, carpenters, electricians, etc do their jobs great so you can do your job great.
You are a leader. You may be a great carpenter, but if you're not a great leader, your business will fall short.

That's what I mean by saying those who are already skilled in these areas have an advantage. When it comes time to rewire a house, I don't know what type of wire to buy or what size breakers to use or anything of that nature. I must rely on the professionals. But if you are a skilled electrician, then you probably already know the best way to get the job done. Which doesn't mean should go do it yourself. Rather, that you will know how to make sure the project you are leading gets done the best it can.

I'm not saying don't do any work yourself. If you are skilled in these areas, by all means you could save some money by doing some demolition yourself, or getting a few friends over to knock out some painting in a day. But don't try to do new wiring and plumbing, etc etc because you will find yourself tied up being the mechanic, and the entrepreneur won't get time to find new deals and come up with creative solutions. And the manager won't get time to balance the checkbook and timebook and do some marketing. And you'll find yourself with less personal time.

So, read the book The E-Myth Revisited, that's required reading for today, and learn to manage your time and rolls in your business efficiently.

First Post: About the blog

This is our first blog, and I just wanted to briefly introduce the blog to you folks!

Everyday I learn something new in this exciting world of real estate investing, and everyday I'd like to pass some of this knowledge on to you guys. We're in the trenches finding deals, weighing our options, setting goals, tearing down walls (literally), raising property values, and giving people a good place to live-- making money all the while.

However, you can lose money in this business. There are many pitfalls that seasoned real estate investors have made, yet you won't have to make them if you know about them first.

Also, there are many questions out there: how do I do a lease purchase, how do I buy a house subject to, where can I obtain financing, what legal aspects might I run into, how can I buy rehab and sell a house with NO money??? You'll find those answers all here as the blog carries on.

The blog is open to questions and questions will be answered on the blog, so fire away!

William Bryant
Simple Properties, LLC
http://simple-properties.com