The fix-and-flip, or rehab, market is one of the most popular places for the freshman real estate investor to start—it comes with the lowest barrier to entry. Shows like HGTV’s Flip or Flop and Fixer Upper make it all look so easy, boosting this popular real estate investment trend to hotter-than-ever degrees by showing everyday couples, with little-to-no money and experience, investing and rehabbing, while still coming away with a pretty tasty profit.
But for the newbie investor, getting facts from shows like these and not doing the very necessary homework beforehand, could leave you turning your big flip into the next big flop.
That’s why we’ve put together this list of the Top Six Things NOT to Do in Real Estate Rehab Investing:
What NOT to do (in real estate investing)
1. Don’t act without a strategy. One of the biggest mistakes new real estate investors make is not having an investment strategy in place. An investment strategy is a model outlining the types of projects you’ll be undertaking (rehab, rental, etc.), their scope and structure.
Oftentimes, an investor will fall in love with a particular property, make the acquisition, and then attempt to build a strategy that centers on that individual property—wrong. The strategy must come first, then you find the property that will work with the strategy—it’s not the other way around.
When it comes to designing your strategy, there is no perfect one-size-fits-all solution. You must choose a plan that fits your unique strengths and weaknesses and aligns with your particular investment goals.
2. Don’t use the wrong kind of financing. Not having enough money to put into the property is another common error investors make during their first acquisitions. That’s why financing is so important.
You want to make sure that the type of financing you pursue is well suited to you, and your project. Are you going with a conventional bank loan, hard money, or something newer and more alternative? Is the loan based on the purchase price or the value of the property after repair (ARV)? What is the interest rate? Is it a short-term or long-term loan? What are the credit and income requirements? These are all components that change depending on the type of financing you use, and they factor prominently into your ability to see the project through, as well as what you walk away with in the end.
3. Don’t settle for a lousy location. The mantra of real estate investing is, “location, location, location”—keep repeating it, it’s that important. For newcomers to the playing field, it’s better to pay a bit more for a property in a good location than to pay bargain basement prices for a similar property in a lousy one—a common mistake for rookies.
What makes a good location? Proximity to amenities such as grocery stores and other retail spaces, schools, parks, and libraries; accessibility to major highways and routes (think, easy commute); and the overall appearance, are all key factors. Whatever you do, don’t condemn your investment career from the beginning by making a hasty decision when it comes to location—there’ll be other opportunities.
4. Don’t lowball the cost of repairs. Before you dip your toe into house flipping, spend some time researching the average costs of repairs such as a new roof, replacement windows, heating and air conditioning maintenance, exterior paintjob or new siding, hot water heater repair or replacement, and mold removal—and that’s just a handful of possible problems.
Create a budget repair sheet and do a walkthrough with a general contractor prior to initiating work. This will help you to estimate the cost. Knowing which repairs are absolutely necessary and which can be cut can save you a lot of headaches and money. Be sure to seek out investors or contractors with more experience and knowledge than you have to ask for help—compensating them for their time and knowledge.
5. Don’t pick crummy contractors. Of course the more sweat equity you can put into the property yourself, the higher your profit margin. But if the skills you bring to the table are limited, or like many of us, you can’t swing a hammer without nursing a swollen thumb afterwards, then contractors it is.
Good contractors are worth their weight in gold. They work hard and do the job right, complete their work on time, clean up when they’re done, charge prices that won’t leave your jaw hanging on the floor, and they’re licensed, bonded, and insured. If you don’t perform your due diligence to find dependable contractors upfront, the decision could cost you big-time when the final tallies are in.
6. Don’t skimp on time. Knowing how long a rehab project is going to take isn’t a skill you start with—it’s an art you develop over time as you build experience. That’s why, until you’re seasoned in the business, it’s a good idea to double your time estimate. Real estate investment is all about time: time to find a property, to close, to renovate, to fix whatever doesn’t pass inspection, to show the property, and finally, time to sell. That’s a lot of time for something to go wrong—and you’ll be very lucky if it’s just one thing. So when you plan your initial strategy, don’t underestimate the time it will take.
According to Warren Buffett, “Games are won by players who focus on the playing field—not by those whose eyes are glued to the scoreboard.”
Anyway you look at it, house flipping is a rewarding, but demanding, endeavor—not to be undertaken lightly. To come out on top you’ll need to focus like never before. Once you leave the starting gate with your first project, your full attention should be devoted to each task at hand until you cross the finish line. Only then will you be able to claim victory.
Being a landlord can be a lucrative proposition, but unforeseen expenditures can put a damper on profits if they aren't calculated into the rent beforehand. The reality is that the costs of a rental property extend far beyond the initial purchase price and fees, so having a firm grasp on expenses will ensure that you maintain a healthy cash flow. The marker by which you measure the success of your rental business will largely be based on cash flow, which is the income left after all expenses have been paid. So, what are the expenses you should factor in when determining how much to charge for rent?
Maintenance. Even if you go to great lengths to rehab a property, it will still require maintenance in the future. It can be hard to foresee what repairs will be needed, but landlords should consider expenses like carpet cleaning, paint, electrical, plumbing and any other fixes that keep a property habitable for renters. The age, size and type of property will impact your costs, but as a general rule of thumb Fannie Mae recommends that a property owner should allocate two percent of the total property value annually to cover maintenance expenses. Landlords often underestimate the cost to upkeep a rental property, and major capital expenses can stifle your cash flow, so have a contingency plan.
Property Taxes. The amount of taxes paid on a property will vary by location, and there can can also be some variance depending on whether the rental property is also being used as your primary residence. Sometimes you will find that property taxes are included in your mortgage payment, but you should still breakout this cost when determining expenses. Taxes are variable, and in many cases they will increase annually. A call into the county assessor will help you determine how much you should expect to pay in the coming year.
Insurance. The cost for an insurance policy can fluctuate a lot depending on the location of the property. Rates can be further exacerbated if the rental is located in an area prone to natural disasters like earthquakes, flooding or fire, which can require additional levels of insurance. As a landlord, you should also consider liability insurance to protect your investment in the event a tenant pursues legal action. In the end, perform the proper due diligence before putting in an offer on a rental property, and contact an insurance agent to determine the specific costs and needs.
Utilities. The property type and market will dictate exactly what utilities you should plan to cover as a landlord. In the case of single family homes, the tenant is usually responsible for all of the utilities. With multifamily properties gas and electric are typically paid for by the tenant while water and/or sewer will be covered by the landlord. Research what the competition is including in rents and what is being passed onto the tenant. To determine the potential costs, contact the utility companies and determine typical monthly usage and cost.
Homeowners Association Fees (HOA). If you are purchasing a single unit in a condominium or a single-family home, you may be responsible for HOA fees. These costs can range from several hundreds of dollars a month to nearly a thousand. Depending on the amount of the HOA fees it could be a nonstarter, so make sure to understand what they are at present as well as whether they are expected to escalate or if there are any special assessments coming in the future.
Vacancies. In the aftermath of the Great Recession, the rental market has recovered and there has been sustained demand. That said, you should still anticipate periods when the property will be vacant. To determine how much money you should set aside, research your local market to understand how long rental properties stay untenanted. As part of the is process, you should also set aside funds to advertise rental properties. While there are free tools like Craigslist that can be effective for marketing a property, other avenues like newspapers, real estate websites or property management companies will come at a cost.
Property Management. Hiring a property manager can free you from the tedium of being a landlord. If you own multiple rental properties, this role might be even more pertinent to your venture. To employ this service, it can cost between 8 to 10 percent of the gross rent, but in return the property manager will handle tenant notices, inspections and evictions. In some instances, you may elect to only utilize a property manager for tenant placement. In that case, the model is often a flat fee that can cost as much as a full month of rent. Even if you choose to manage the property yourself, you should still account for the costs (e.g. gas, time, etc.) associated with it.
As a landlord, you can expect to encounter your share of surprises, but there is no need for expenses to be one of them. By mitigating the unknowns, you can be on your way to a profitable rental property.
The American Dream used to constitute getting married, moving to the suburbs and buying a single-family home for a growing family. But today's generation has forged a new path. For the first time in history, more than half of the world's population resides in cities. One economic study expects that 66 percent of the population, or 2.5 billion people, will reside in urban areas by 2050.
As young people finish school, they are increasingly delaying marriage, kids and mortgages, which had been seen as a rite of passage into adulthood for previous generations. Instead, they are flocking to cities in record numbers in pursuit of career opportunities and a better lifestyle.
The resurgence of cities as an economic center at the beginning of the century has made them a beacon for highly skilled jobs with better pay and benefits than those found in the suburbs. These thriving city centers also offer urbanites the ability to live, work, shop and entertain in close proximity, satisfying their desire for shorter commutes and greater walkability. Another research report revealed that 62 percent of Millennials prefer to live in mixed-use communities found in urban centers.
The predilection for greater amenities and community style living has made apartments more attractive than they have been to previous generations, so Millennials are increasingly swapping mortgages for leases. As a result, the demand for apartments has been strong, and in the last five years rents have increased 20 percent nationwide.
Despite the current push towards cities, the suburbs aren't completely out of fad. Many experts suppose that the deferral of marriage and children has only caused Millennials to put off moving to the suburbs and buying a home. Over time as this generation begins to age, they too will seek greener pastures in the suburbs.
That said, urbanization has had an undeniable impact, and the suburbs are being reimagined. In an effort to bring urban sensibilities and conveniences to these residential areas, there has been a rise in mixed-use developments. These communities allow for better access to amenities that younger generations crave.
A real estate survey by the found that 48 percent of people would rather live in communities with small yards but within walking distance of amenities than live in communities with large yards but they have to drive to all amenities.
As urbanization continues to take hold and drive demand for real estate in cities, analysts believe in the short run that investors and developers in the rental housing sector will be at an advantage.
For those looking to infiltrate the market, it is important to remember that although properties in cities can be a profitable investment not all are created equal. When looking for investment opportunities, identify areas where housing affordability is a barrier to homeownership. In cases where rent is high compared to asking prices, the investment could be lucrative. Also, keep in mind that prospective renters value walkability and access to public transportation. So, look for neighborhoods that are close to bus stops and innovation hubs with high job growth.
Hi Mike,
AssetAvenue has two loan programs that might fit your funding needs. You can visit our site at www.AssetAvenue.com to get an instant online quote or you can contact us at 855-280-4248 to get additional loan details.
Listed below are the sources for the article:
- RealtyTrac
- Fannie Mae
- Urban Institute
People are trading homeownership for rental properties in large scores.
For the last decade the number of renter households has been on the rise. A Housing Vacancy Survey found that between 2005 and 2015, the market experienced its largest 10-year increase since 1965 with 9 million households entering the rental market, bringing the total number of renters to 42.6 million.
The demand for rental properties is being driven by a number of factors. A sluggish market for new home construction has resulted in a dearth of affordable starter homes. Young people who are traditionally the most active homebuyers are delaying marriage, kids and mortgages . And many Americans are still dealing with the fallout of the housing crisis and have been forced into the rental market while they repair their credit.
But the boon to the rental market is also being marked by a shift in societal attitudes. Many people, especially aging Baby Boomers, no longer want to be saddled down by the responsibilities of owning a home and are finding an appreciation for the latitude offered by renting.
This trend towards renting shows no signs of slowing down. A recent renting study showed that it expects the homeownership rate in the U.S. to continue to decline for at least the next 15 years, which will cause a sustained surge in the demand for rentals.
As consumer demand for rentals soars, it begs the question, how will the market manage to keep up?
Even as multifamily construction continues to skyrocket, apartment buildings are not able to shoulder the demand on their own. For one, the protracted timeline for completion on these properties is being outpaced by the growing rental population. And much of the new apartment construction has been luxury, which is not a fit for the many mid-market renters.
So, at an increasing rate, single-family homes are absorbing the large pool of people who are in the rental market. A new real estate report in October found that more than 18 million non-owner occupied single-family homes, or one in four single-family homes, is a rental property. This notion is further corroborated by a government study, which showed that 52.4 percent of renters ages 25 to 34 lived in single-family homes, compared with 43.4 percent in apartments.
That said, it is a good time to invest in single-family homes as rentals and those that do could be rewarded handsomely. As demand for rentals has ticked upwards, rents have increased 20 percent nationwide over the last five years. It was noted in one study that the average annual gross rental yield for single-family homes dropped slightly from 8.8 percent to 8.7 percent year-over-year, they still offer attractive returns as compared to other investment opportunities. By most accounts, experts expect that single-family rental investors will be a driving force in the real estate market for many years to come.
In the years following the Great Recession the real estate market has been rescripted. Homeownership that had once been the cornerstone of the American dream has fallen into the background as many consumers opt to rent - whether out of necessity or preference. And while home buying is nary a thing of the past, many investors may find that renting single-family homes rather than selling them might offer the best returns.
For those investors eager to get in on the action, several studies identified the strongest markets for buying single-family rentals in the first seven months of 2016. It focused in on markets that demonstrated high gross annual rental yields as well as areas marked by low owner-occupancy rates, which can signal a strong demand for rental properties.
1. Clayton County, Georgia in the Atlanta metro area - 24.3 percent annual gross rental yield
2. Baltimore City, Maryland - 22.8 percent annual gross rental yield
3. Wayne County, Michigan in the Detroit metro area - 18.5 percent annual gross rental yield
4. Bibb County, Georgia in the Macon metro area - 17.7 percent annual gross rental yield
5. Bay County, Michigan in the Bay City metro area - 17.6 percent annual gross rental yield
Hi Stephen,
Scott Burman will reach out to you!
Best,
Jackie
Good morning Paul. Scott Burman will be contacting you to answer your questions on our rental loan program.
AssetAvenue offers the following rental property loan:
- Loan Amounts: $125K - $1M
- Max LTV: 75%
- Min Credit Score: 650
- 30 Year Fixed Rates: 6% - 8%
Contact us at 855-280-4248 to get additional loan details or visit our site at AssetAvenue to get an instant rental quote online. At AssetAvenue you can apply and get approved all online.
Starting a house flipping business is exciting, but it can also be overwhelming. With so much to learn, and so many decisions to make, no one flips their first house without encountering at least a few hiccups along the way. Flipping is hot right now—due in part to reality TV shows that make it look easier than it is.
In fact, according to one study, some markets—such as Buffalo, New York—are at all-time high. For newbies thinking of getting into the game, this means the competition is stiff. You’ll need to bring you’re A game and use every advantage you have. By forming a well-rounded view of what home flipping entails before you get your feet wet, you may be able to avoid the usual pitfalls.
Begin by building your house flipping business on a solid foundation. The following pointers will tell you how.
House Flipping Basics for the Novice
Do your homework.
Before you dive headlong into house flipping, it’s essential to spend some time researching it. House flipping is a multifaceted undertaking and you’ll never know it all, but to attempt to do it without some due diligence on the education front would be disastrous, not to mention just plain foolish. You don’t need to spend thousands on online courses, but you do need to do some reading. The Book on Flipping Houses by J Scott is a great place to start.
Of course reading books by the experts is only one way to learn. Do you have any friends or family that have experience with house flipping? If so, don’t let a resource go to waste—ask them about their experiences, their successes, and what they wished they’d done differently. Better yet, see if you can mentor under them.
Master the math.
Don’t let the manual labor fool you—at the end of the day, house flipping all comes down to a numbers game. If you don’t roll up your sleeves and dig into the math on the front end, you could find yourself in a money pit further down the road. Luckily, you don’t have to be a rocket scientist to flip houses. The math is simple and straightforward—fifth grade level.
The first—and most important—equation to learn is "The 70% Rule." This formula tells you the maximum price you can purchase a particular property for, and still be able to sell it for a profit—the Maximum Allowable Offer (MAO). To do this equation you have to know the after repair value (ARV) of the property. This amount, usually determined by your real estate agent, is an estimate of how much a particular property will sell for, once all the repairs and renovations have been completed. Once you've established the ARV, multiply it by 70%, and then subtract the anticipated cost for repairs.
Know your market.
Flipping a house is a lot of work and you’re going to be there nearly every day until it sells. That’s why it’s important that the house you purchase is fairly close to where you live—eliminating the extra wear of a long drive at the end of a hard day’s work. For this reason, it’s vitally important to know your local market, your town, city, or area. Check out what properties are selling for and how long it’s taking for them to sell. When considering a specific property, ask questions like: Is there a school nearby? How about amenities such as parks, grocery stores, and libraries? What are the demographics of the area? All of these things can help you determine your profit margin.
Assemble a solid team of contractors.
It may take some time, but if you’re going to be in this business for the long haul and you’re not doing the hard labor yourself, you’ll need to build a team of contractors that are dependable and trustworthy. Of course this is easier said than done—quality work for a reasonable price is a rare commodity. By far the best way to find these individuals is to get a referral from other investors you know. Don’t rely solely on someone else’s word though, be sure to shop around for multiple bids—weighing price against reputation. The contractors you hire should be licensed, bonded, and insured. When negotiating the cost of a job, ask questions, be specific about what is included and not included in the work, and get it in writing.
Be patient.
Rome wasn’t built in a day—neither is a house flipping business. Although time is of the essence when it comes to profit, don’t rush through your first house flipping venture, purchasing an overvalued property, allowing shoddy workmanship on the rehab, and selling to the first buyer who makes an offer, out of fear. Give yourself the time and space to make thoughtful decisions. And cut yourself some slack when something doesn’t go as planned. House flipping is all about the unexpected—but with flexibility and persistence the patient investor will find his, or her, way through the obstacles.
As with most things in life, although there isn’t one single path to beginning a successful house flipping business, what you put into it corresponds to what you get out of it. Or, as the financial analyst and advisor, Paul Clitheroe, said, "Invest in yourself. Your career is the engine of your wealth."