What is ‘prehabbing’ in the field of real estate investing?
Prehabbing is, as the name suggests, a prelude to rehabbing. It can also refer to simple, light rehabbing. As you may have already guessed, it is becoming popular again. So how does prehabbing work? Why might it be a valuable real estate investing strategy for you? Moreover, when will the tipping point come when more real estate investors should be considering it as their preferred M.O.?
What is Real Estate Prehabbing?
In its purest sense, prehabbing is clearing the slate for rehabbers that will buy and hold investment properties as rentals. It can make properties easier and more appealing for the end buyer. In turn, this helps increase perceived value and can help flip houses much faster. Real estate house flippers can use prehabbing, as outlined above, to find a good middle ground in between wholesaling properties as-is and full rehabs. For some, this can dramatically increase the attractiveness of a property while broadening the buyer pool. In some cases, this light rehabbing can take a rundown property from unlivable to actually being both functional and attractive to a potential buyer.
10 Reasons for Prehabbing:
- For flipping houses faster
- Faster turns enabled more homes to be flipped each month and year
- Raising monthly, annual and lifetime income and returns
- Maximizing return on investment
- Maximizing return on property improvements
- Selling properties for more money
- Shortening time from acquisition to having a marketable product
- Reducing cash needed for improvements
- Lowering risk associated with tying up capital and gut rehabs
- Minimizing management requirements
So what does a Prehab Involve?
How much improvement work should be involved or not? What focus and principles can keep real estate investors on the right track here? Perhaps the best way to look at prehabbing and to make it work is to look at it as:
- Maximizing the value and profit of a real estate investment opportunity
- Keeping improvements, risk, and time involved to a minimum
The primary reason many engaging in prehabbing is that many prospective end buyers simply can’t see the potential or perceive more work and expense than may be there. Many discounted homes being picked up by wholesalers today can look in pretty bad shape. Clearing up the cosmetic appearance can make a world of difference in the value of a property to an end buyer whether they are going to live in it, rehab and resell it or stick a renter in it.
At the same time, many rehabbers may choose to scale back to prehabbing to limit the amount of cash they tie up in a single property, avoid getting caught up in gut rehabs that can uncover or create more expensive. So, in many cases, this might just be clearing the slate by hauling out the trash, cleaning up the yard and perhaps making a few minor cosmetic patches.
On the other hand, many properties may just need a few minor upgrades to take them from being beat up handyman specials to ready to rent or live in. For example; replacing a couple of appliances, changing stained carpet or a new interior paint job. Obviously, a landlord ought to be willing to pay more and be faster to act on an investment opportunity that is ready to lease immediately than one which they have to begin working on, and may not know what issues lay beneath the mounds of garbage.