The rehabbing industry can be incredibly lucrative for those who know what they are doing. However, to become a successful rehabber, you will likely have to face a number of trials and tribulations along the way. Luckily for you, we have been there and done that. The following illustrates some of the most common rehab mistakes and the steps you can take to successfully navigate around them. After all, the biggest mistake an investor can make is not learning from the mistakes of their predecessors.
To view rehab mistakes 6-10, please visit Part 2 of our series.
Mistake #1: Falling In Love With The Wrong Property
The life of a real estate investor is one in which infatuation is not permitted. At no point should the end product be a reflection of your particular admiration. Viewing a property through rose-colored glasses only serves to cloud judgment and place potential profits at risk. In fact, demonstrating an affinity for a particular property, without any means of justification, can lead to sizable complications that are reflected in a poor bottom line. Real estate investing is, after all, a business.
Each investment property needs to be evaluated on its own merits and with the appropriate data. The numbers supporting a property should supersede any affinity you have developed. Of particular concern, however, are those that neglect to place their numbers above everything else. Some investors fall hard and fast for properties, and it doesn’t usually end well when they do.
The nature of the real estate industry calls for a variety of skills – not one of which has to do with personal interests. All too often, investors will track a property for months on end, only to develop a “good feeling.” They may think they see limitless potential and endless possibilities, but these claims are unsubstantiated. Emotion quickly takes the place of reason and before they know it, they are looking right past flaws they would have otherwise noticed. This is a recipe for disaster, as any investor who doesn’t acknowledge the facts can be left with a big hole in their wallet.
Becoming enamored with a property should happen, but only under the right circumstances. As long as you like the property for the right reasons, that is to say the numbers add up, it is acceptable. It is extremely important to focus on your return on investment (ROI). If you find yourself falling for a property, give yourself a reality check and focus on the numbers that compliment the deal.
If you try too hard to make a deal happen, you will find yourself in a heap of trouble. Therefore, you need to know when to walk away; regardless of how much you like a property. It may be a difficult decision, but it is one that you will be glad you made in the long run. Not taking the ROI into consideration places you at an increased risk to lose profits. Realize that sometimes, the best decision you can make will be to walk away.
Mistake #2: Inaccurately Calculating Project Costs
Poor estimations are typically the result of both a lack of preparation and education. According to BiggerPockets, rehabbing is “one of those subjects where the risk involved is directly proportional to the knowledge you have.” As such, to mitigate any risk of preforming a bad estimation, investors are advised to conduct their due diligence – research, research, research. In this field, you must feel confident in your rehab estimations before you even make an offer. Impatient investors often make the mistake of bidding on a house without accurately calculating repair costs. Once again, this is a disaster. Inaccurate repair costs will eat away at any ROI you hoped to attain.
Underestimating Time & Repair Costs
As a general rule of thumb, expect repairs to cost more and take longer than you anticipate. Conversely, if you neglect to properly account for these numbers, your rehab could turn into a money pit. You may even struggle to make a profit if your estimates were off significantly. Remember, you make money on a deal when you initially purchase a home, not when you sell it. Therefore, it is paramount to have an understanding of just how much time and money you will need.
Without question, the majority of failed rehabs are directly correlated to poorly calculated costs and schedules. You must accurately estimate all of the costs you are likely to incur, as well as which upgrades you are going to make. However, equally important is the time it takes to complete said work. Seasoned investors will quickly acknowledge the importance of being able to accurately account for the cost and time of repairs. Each successive rehab, in fact, is an opportunity to fine-tune this approach.
Customizing your Estimation Process
The rehab industry allows for investors to customize their approach in just about every area. The same holds true for the method in which investors estimate their rehab costs. There are countless methods investors may use to calculate rehab costs and time schedules. However, those that are relatively new to the business may appreciate a starting point. Having said that, new investors are advised to error on the side of caution. Assume that you are always underestimating. There will always be unknown variables that can drive up costs. The key is being prepared, being patient, and always learning from previous experiences.
Aside from that, you will want to recognize construction costs in your area. Understanding construction costs will give you a better sense of where costs will end up. This, like everything else, well come with experience. Once you know how much things cost and how long they will take, you will be able to estimate deals more accurately.
Once you have familiarized yourself with the rehab process, you will want to generate a property repair estimate sheet. This evaluation tool will include a comprehensive list of the upgrades you will need to make to bring a property up to code or into “sellable” condition. In the form of a spreadsheet, this tool is designed to outline the majority of the costs of a project so you can assess the costs associated with improvements. The estimate sheet will include major items like those listed below:
- Exterior Pain & Siding
Mistake #3: Over-Rehabbing A Subject Property
There is a fine line in the rehabbing business that must be accounted for at all times. While you will want to produce the best product possible, you will need to temper your expectations. Over-improving a rehab is a very real possibility. All too often, new investors will incorporate upgrades that exceed expectations in the neighborhood to make a house more appealing. Remember, however, that you are rehabbing to sell. You need to keep expenses to a minimum without providing an inadequate product. Subsequently, you will want to upgrade your house to the point where it is slightly better than the available comparables. Make it stand out, but not too much.
3 Ways To Avoid Over-Improving A Rehab
The following illustrates common techniques investors can use to avoid over-improving their rehab properties:
- View other comparable properties in the neighborhood and try to mimic their improvements and finishes.
- Look at new home models and take note of their designs, paint schemes and finishes. Stay true to the neighborhood standard.
- Choose specific “sizzle” features that won’t cost too much.
Mistake #4: Taking The DIY Approach
The prototypical “green” investor is usually under the impression that they can save more money on a rehab if they do everything on their own. Initially, the do-it-yourself approach seems logical, as you are not paying for contractual labor. However, this tactic usually ends up costing investors more money – and not necessarily for the reasons you may assume.
As an investor, it is critical to use your time wisely. You always want to be functioning at your highest and best use. A rehab investor should focus on the investing activities that keep projects going and successful. While you may be able to swing a hammer with the best of them, your time will be better spent on investor-specific activities. Focus on finding more deals to add to your pipeline, funding deals, fixing deals, and flipping deals. By concentrating on higher priority tasks, you will benefit your entire supporting cast. Leave the labor to the contractors who are most likely much better at it than you are.
In addition to prioritizing your role as an investor, you need to acknowledge that a contractor will preform quality work. If you are not proficient in the field of construction, you run the risk of losing lots of money while simultaneously putting a sub-par product on the market. This is a slippery slope that can cause a lot of issues down the line – for you and the perspective homeowner.
Consider the time you are investing in a DIY project compared to the cost. It is irresponsible to save $35 on a DIY project if you typically earn $50 an hour. The numbers simply don’t add up most of the time. Therefore, remove yourself from the equation. Let the people you work with do their jobs while you do yours. Rehabbing is a machine with several moving parts – make sure you are doing your part to keep it going. At the end of the day, your priority is to land more deals that will make more money down the road.
Mistake #5: Neglecting “Sizzle” Features
While sizzle features are anything but necessary to live with, they are instrumental in generating a demand for your property. The appropriately dubbed “sizzle features” are the most crucial improvements you can make to attract a potential buyer. Accordingly, when a sizzle feature catches the attention of a buyer, it is likely to aid in their decision of whether or not to buy the property. Not only will these features set your home apart from the rest, but they may be all that is needed to convince a buyer to buy.
Seeing as how this article is specifically intended to point out the common mistakes investors make during a rehab, it is safe to assume that not all investors use these features correctly, if at all. It is important to remember that for a homebuyer, choosing a place to live, to a large extent, is an emotional endeavor. They are not just buying a house, they are buying a home in which they may create lasting memories. It is up to you to accommodate their needs through the addition of specific sizzle features. The trick, however, lies in adding the right features.
Choosing The Right Sizzle Features
As most investors are aware, kitchens and bathrooms draw the most attention from prospective homebuyers. Therefore, it goes without saying that these two rooms will require the majority of your attention when it comes to sizzle features. Furthermore, these functional areas are easier to incorporate additions that stand out to a buyer. Sizzle features in these areas may include, but are not limited to:
- Kitchen skylights
- Pot filler faucet
- Granite countertops
- Under cabinet lighting
- double oven
- Jacuzzi tub
- Rain shower head
- Heated bathroom floors
- Subway tiles
- Surround sound stereo system
Once again, it is important not to over-improve your property. While it would be nice to add each of these features, it may not be conducive to your bottom line. See what other houses in the area have done and try to “one-up” them. Remember, keeping budget in mind, you want to be slightly better than those houses around you. Pick out the sizzle features you think will generate the most buzz and stick with them.
For more information pertaining to common rehab mistakes, please visit Part 2 of our rehab mistakes series.