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Real Estate Exit Strategies (Part 3): Rehabbing

A myriad of real estate exit strategies exist for investors to partake in. Not surprisingly, new investors tend to prefer the almighty wholesale deal. However, none may be as popular as the almighty rehab. This particular exit strategy requires the most work, but the rewards that ensue are well worth it. Accordingly, rehabbing properties remains one of the most lucrative real estate exit strategies, but it requires an acute attention to detail and a lot of time to master. Those intent on learning the intricacies of a truly profitable rehab will need to familiarize themselves with a multitude of independent skill-sets. Be sure to look at our rehabbing checklist if you feel like you may be forgetting something.

Investors familiar with this particular real estate exit strategy have most likely reaped its rewards. In fact, rehabbing has facilitated our largest profits for years. More importantly, if you are willing to learn this process, you too will likely experience similar profit margins. Please note, however, that while rehabbing does allow for sizeable monetary gains, it is not a guarantee. The only way to mitigate risk and increase profitability is to study the rehab process in its entirety.

Similar to that of other real estate exit strategies, rehabbing a subject property requires that it meets your criteria. Ultimately, rehabbing serves as a good real estate exit strategy when:

  • You do not need to be paid immediately.
  • You are intent on generating brand awareness, as it is a prime marketing opportunity.
  • There is a potential for large profit margins on a subject property.
  • The property is a safe location.
  • You have a trusted team to work on the property – this includes contractors, lenders, title company, etc.

Rehab Stages Overview

It is important to understand, for an investor, that rehabbing is one of the most complex real estate exit strategies. There are so many components involved that risks may be hiding around every corner. Therefore, if you are new to the industry, you should always start out with projects that require a minimal amount of work. This way you are not immediately in unfamiliar territory that you are unable to navigate. Over time, as your knowledge and confidence are supplemented, you can begin to take on increasingly larger projects that ultimately prove to be more profitable.

The rehab process can be broken down into several stages, seven to be exact. We strongly advise you do the same for your rehab business, as it will help to streamline the entire campaign. It is important to have a proven system in place, so you can save both time and money. The following provides a quick snapshot of the entire rehab strategy:

  • Stage #1 (Scope of Work Development): Draft a step-by-step checklist that itemizes exactly what your contractor needs to do throughout the entire property.
  • Stage #2 (Job Bidding and Contractor Selection): Let prospective contractors know you are not a retail customer by bringing in several to bid for you’ your business.
  • Stage #3 (Contract Communication at Signing): As an investor, it is important to protect yourself. Make sure the proper paperwork is signed before you start a rehab.
  • Stage #4 (Six Critical Documents): Make sure the following documents are signed: Independent Contractor Agreement, Scope of Work, Payment Schedule, Contractor Insurance Indemnification Form, W-9 Tax Form and the Final Unconditional Waiver of Lein.Stage #5 (Managing the Rehab Process: At this stage you will be managing your contractors through the physical rehab.
  • Stage #6 (The Property Closeout): The property closeout must include a final walkthrough and the final payments to your contractor.
  • Stage #7 (Preparing to Sell): Get the property cleaned up as quickly as possible and ready to sell.

Three Rehab Categories

As far as rehabs are concerned, these real estate exit strategies fall under three categories. They are as follows:

  • Personal
  • Rental
  • Flip

While each suggests its own independent exit strategy, these approaches are synonymous with one another. The same basic principals still apply. However, the method in which profits are made is slightly different.

A personal rehab consists of fixing up your own property. Improvements made are specifically for your benefit. Richard Warren, in association with BiggerPockets, recommends that most people should “start by rehabbing a house for their own personal use.” Doing so will enable you to determine the scope of work that is required for an individual project without any time constraints and pressure.

Rehabbing a property with the intentions of flipping it requires a completely different strategy. Due to holding costs, time is a major factor. Time is literally money, as holding costs will eat away at your profit every day. It is imperative that you complete a rehab in the shortest time that is required to construct a nice home. For investors looking to rehab a house on a budget, this strategy may require additional resources, including working knowledge of the industry and rehabbing process.

Investors may also rehab a property to rent out to future tenants. As you may surmise, this process is very similar to a rehab and flip scenario but instead of selling the property, your real estate exit strategy consists of renting it out to a prospective tenant. Current market conditions will ultimately determine if renting is the best solution.

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