There’s no doubt that the fix and flip approach to real estate investing is one of the most profitable ways to grow wealth. This is especially true for new investors. It sounds easy, too – you find an undervalued property in need of some repairs, fix it up and then sell it for a considerable profit. In practice though, there are many challenges that will pop up in your way. One of the most dangerous is not properly calculating and managing your rehab costs.
Create a Detailed Repair List
You should create a detailed list of all of the repairs that need to be made. This should be done for every property that you’re seriously considering purchasing. The detailed repair list will help serve as a roadmap for guiding the property from its current value to your estimated ARV. Your list should be comprehensive, as well as regularly updated along the way to reflect any changes.
While it needs to be complete, your repair list does not have to be complicated. In fact, it should be really simple. All you’re doing is noting down the repairs that need to be made to bring the property up to its ARV. Next, to these repairs, you put an estimate of how much each job will cost.
When completed, this report will give you a good look at the scope of the rehab and what you can expect to spend on repairs. You should use this to ensure you’re making an offer that includes a nice cushion of profit.
The best bet is to enlist the help of your contractor or inspector in order to accurately determine the home’s problems. Any missed issues could wind up causing a beating to your budget, so it’s crucial to be as thorough as possible.
Ensure an Efficient Use of Labor
Things are bound to go wrong when you’re working with multiple subcontractors. Perhaps the drywall team is taking their time, while the painter is forced to sit back and wait for them? Maybe the flooring contractor can’t tile the bathroom until the plumber finishes with his work?
Meet with your rehab team before any work begins and determine in which order repairs should be completed. This can help avoid labor wasted by workers being on-site but not fully able to proceed with their jobs. It also works to streamline the entire process and allow you to flip your investment sooner.
Scheduling your team in the right order also helps prevent having to re-do work. I can’t count how many times I’ve spoken with flip and flip investors who have had walls repaired and painted, only to have them ripped out to access the pipes behind them. In this case, thinking ahead and being sure to schedule the plumber first would save notable time and wasted money.
The Best Way to Get Started
In a majority of cases, it’s the worst, most run-down properties that offer the biggest returns. Too frequently though, inexperienced new investors rush out to capitalize on this and end up purchasing the cheapest homes that they can find. While these may very well be good deals, they can just as potentially be huge money pits.
The next time that you chat with an experienced real estate investor, make sure to ask them about instances of running into unexpected renovation costs. It happens all of the time, and most often with the most beat-up houses. Sometimes, it can cut down on the profits. Occasionally though, it can turn the property into a loss altogether. For a seasoned investor with a substantial bankroll, this can be an unpleasant experience. For a new investor with limited funds, this could put them in a sticky financial situation.
Instead, a much safer approach to getting started with fixing and flipping homes is to focus on the ones that are great values with only limited cosmetic repairs needed. These deals are much more difficult to come by, however, and often don’t generate as much profit. For a beginning investor though, they do generally pose much less risk.
That being said, the “ugliest” houses can still be some of the best opportunities for any investor, regardless of experience or checkbook size. Just be sure to do your due diligence and understand the dangers – especially when it comes to rehab costs.
Fix and Flips properties can be some of the best investments for building wealth through real estate. They can also pose more risk than other ways to invest in real estates, like wholesaling and mortgage payment assignment. If you plan to invest in the fix and flip homes, it’s important that you understand and plan ahead for the various costs and problems associated with rehabbing. By creating an intricate list of needed repairs and planning the most efficient use of your team, you can routinely avoid many of the most costly rehabbing pitfalls.