Are you interested in real estate investing, or more specifically, rehabbing properties? If so, there are several things you need to be aware of. Selecting the right property can be tricky if you aren’t sure what to look for or where to turn for information. In this article, we will examine some of the most important factors when considering what properties are best for rehabbing and selling for profit.
How Do I Choose the Right Property to Flip?
If you are investing in real estate, there are time-tested rules you should follow. Buying and rehabbing properties for profit is not as easy as many would lead you to believe. But, with a sound strategy and the right amount of resources, it can be done. There are lots of things to consider; in this brief article, we are going to list the most important factors that apply in almost all scenarios.
Most Important Factors in Real Estate Investing
Without a doubt, the most important factor in the value of real estate is the location. Therefore, finding a house in a good location and for a good price offers the highest profit potential. When looking into a location, first consider the city and neighborhood the property is located within. Factors such as size of the neighborhood, traffic, and overall appeal of the servicing school district are very important. Also, is the property easy to access, or is traffic a nightmare?
Is the property located near shopping, entertainment options, and public transpiration? Finally, are there any negative factors that would cause the property to decline in value such as a noisy interstate highway nearby or being close to an airport? These factors and many others will give you a good idea of whether the location of the property adds or subtracts value. So pay close attention to location as this factor alone will make or break your profit margin in many cases.
Condition of the Property
The next most important factor in real estate investing is the condition and characteristics of the property. When looking for a property to flip, low curb appeal is usually best. However, it is important that the property is free from any major structural issues unless you have lots of expertize in home renovations. Also, it is important that the home mostly complies with other homes in the neighborhood in terms of lot size, the number of bedrooms and bathrooms, and total square footage. A home that is either significantly smaller or larger will have a harder time selling and consequently, may not be a good option for a flip.
Again, don’t be afraid of lots of touching up and cosmetic work that needs to be done, as these properties are typically the best in terms of profitability. Finally, don’t forget to focus a great deal of attention on the appearance of the exterior. The look of a home from the street is much more important in selling the house than higher end countertops. One only gets one chance to make a first impression with buyers, and the first impression of a prospective buyer is viewing the property from the street.
Another important factor is financing the home. First, if your lender tells you there is no money to be made, take their advice and move on. Typically, lenders will only lend around 70% of After Repaired Value or ARV. If the property costs more than 70% of the projected ARV, there is no profit margin left for the flip. The expenses related to selling the property and any unexpected cost, which have a way of creeping up, will quickly erode any money left over after the loan is paid.
Analyzing how much the rehab work will ultimately cost and how long it will take are highly speculative. Consequently, ARV figures can be both time-consuming to calculate and inaccurate. Therefore, a professional appraiser is the best option to get a more accurate ARV figure, but this adds to the overall cost of the project. Many lenders will require a licensed appraiser for rehab loans.
Finally, be realistic when factoring how long the rehab project will take and budget accordingly. Projects that take longer than expected are the most costly and will ultimately decrease your profit margin at the end of the sale.
Also, it is imperative that you have good credit. Without very good credit, lenders will not approve you for these types of loans. Unless you have enough cash to finance the project yourself, without good credit, you won’t be flipping houses any time soon.
Also, don’t forget to pay attention to market trends. Many people lost a great deal of money buying homes with the intention of flipping them only to be stuck when they couldn’t find a buyer.
Find a Mentor
This is something that many people don’t think about but it can be very valuable. If you know of someone in your area that has been successful at real estate investing and rehabbing properties, you should try to network with this person as much as possible. There are so many potential hazards and mistakes that inexperienced house flippers can encounter that it is very helpful if you have someone to advise you through the process at least once.
It may even be worth offering this person a percentage of your first deal if they are really successful because they are sure to have lots of information that will take you a long time to learn on your own.
Real estate investing can be a path to financial freedom. However, house flipping has gotten somewhat of a bad name due to misinformation and the sheer amount of publicity it has gotten in the way of TV shows and seminars. For every successful person, there are many more that get in over their heads and end up breaking even or losing money. First, you need to decide whether rehabbing properties is for you. Secondly, you need to arm yourself with as much information as possible so you can develop the right strategy that will allow you to make money flipping houses.