This week we will look at rehabbing with the intention of flipping. Of rehabbing for personal use, rehabbing to rent and rehabbing to flip, flipping is,  by far, the riskiest of the three. However, it can also be the most lucrative if you do it right. The key word here is “if.”

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Tags: real estate investing, Rehabbing

I am now halfway through my 2-1/2 week vacation and currently in Hawaii. Here is another repost of a previous article on rehabbing.

Rehabbing A Rental Property

Last week we discussed rehabbing a home for personal use, this week we will explore rehabbing for the purpose of renting. Of the three main types of rehab, personal use, renting and flip, the rental falls in the middle in terms of risk. If the rental market is strong where the house is located, you do not have to worry about your exit strategy.

A simple fact of real estate investing is that renters will not take care of a property the way an owner would, in most cases. Another fact is that renters do not have the same expectations as buyers when it comes to quality. A person looking to buy a property might expect ceramic tile floors and granite countertops where a renter is quite satisfied with vinyl flooring and a laminate counter. This means that you can spend a lot less money on the rehab if your ultimate goal is to use it as a rental property.

Basic Systems

Tenants and buyers will both have certain expectations. They are looking for a home that has the basic systems in good working order. This means that the plumbing and electric must be adequate, the heating system works properly, the roof keeps the house dry and, in warmer climates, the air conditioning functions, as it should. With a rental, if these systems are not in order you can expect to have higher than normal maintenance costs.

Regardless of the ultimate goal, any rehab should include bringing the basic systems up to an acceptable level of performance. This is not an area where you should cut corners. Upgrading the electric or the plumbing doesn’t have the pizzazz of a new kitchen or bath and won’t add much value on resale or yield a higher rent. However, a house with the basic systems in poor condition can subtract value and make it difficult to sell or rent a property.

Durability Counts

Renters tend cause a greater amount of wear and tear than owners do. That being the case, you should usually choose items of greater durability wherever possible. When choosing carpet, paying a little more for a product with better durability may actually be less expensive in the long run. If you can avoid using carpet I certain areas, even better. You could consider using a product laminate flooring in high traffic areas.

When the time comes to sell a property, you can go back and complete the rehab. The time to do the fancy things and add the amenities that buyers love is when you are ready to sell. There is no point in doing a lot of high-end, high-cost rehab on a rental. More likely than not, you will just need to do it all over again when you are ready to sell.

Buy It Right

One of the most difficult aspects of real estate investing is finding property that will provide a positive rental cash flow. As hard as it is, it is significantly easier if you buy rehab property. Since a fixer-upper should be available for well below market value, it is likely to command a much higher rent as a percentage of purchase price. House “A” and house “B” may command the same rent if they are in comparable condition. However, house “A” may sell for $100,000 at full retail, but house ”B” is selling for $50,000 with $20,000 in repairs needed. The total costs for house “B” was $70,000 but will rent for the same amount as house “A” even though that house costs $30,000 more. That could well be the difference between a house that helps put food on the table as opposed to a house that eats you alive.

A fool and his money are soon elected.
- Will Rogers

Tags: real estate investing, Rehabbing

I am curenlty sailing the Pacific on a 2 1/2 week cruise (yes, this is a great business).  Rather than skipping my weekly posts, I thought I would share a previous article on getting started in rehab real estate investing.  And you thought re-runs only happened on TV!

Getting Started In Rehab Real Estate

When you are renovating a house with the intention of flipping, you need to keep the end user in mind. This usually means making conservative choices that will appeal to the widest number of potential buyers. If the house is going to be your residence you have the ability to incorporate your own personal taste. If you want purple walls with a pink ceiling, then go for it. Rehabbing a house for your own use allows you to create a home that fits the way you live.

You still need to keep resale in mind if you have any intention of selling in the near future. Determine what you resale timeframe might be and work with that in mind. If it is going to be a long-term hold you should do whatever makes you happy and fits your lifestyle.

Instead of trying to earn a bazzillion dollars on your first deal, look for one that can propel you to future success. Start small and keep the project within your ability. With each success you can move into bigger and tougher projects. As your ability grows, your profits will increase and your profits will soar.

Happy rehabbing!

 The best way to see the future is to create it. –Unknown

Tags: flip, Flipping Houses, flipping real estate, real estate investing, rehab, rehab real estate, Rehabbing

It’s 10am, do you know where your building inspector is? You certainly know where he isn’t, he isn’t approving the most recent work so that you can move on with your project. Your inspection was scheduled for first thing in the morning and the inspector finally shows up near the end of the day.  On the one hand you want to yell, scream and complain, on the other hand you know that you need him to sign off on the work so that you can proceed.  Outwardly you are respectful and cordial, inside you are seething and thinking, “next time I’m doing this without permits!”

Do I Really Need Permits?

It’s very tempting to do renovations without pulling permits.  You can save time, money and a big hassle, but at what cost?  The primary reason that municipalities require permits is so that they can be sure that work is performed to acceptable standards and that it meets all building codes.  The codes are created to set minimum standards for safety and appearance.  These standards give home buyers a reasonable level of assurance that a home is safe for them to live in. 

A lot of cosmetic work can be done without permits.  Installing new carpets, painting and simple changes do not normally require any kind of approval.  Major renovations involving plumbing, electric, foundations, extensions etc. almost always will.  A good starting point is the local building department.  They can give you an idea of what the local requirements are.  When in doubt, give them a call.

We Don’t Need No Stinkin Permits!

When working with contractors you need to be careful.  If they tell you that they don’t need permits to do the project you should check to be sure.  It could be that they are unlicensed or they may be looking to cut corners.  Be especially wary if they say that you can save money by not pulling permits, you may end up paying a lot more in the end.

Big City vs. Small Town

When working with a building department in a large city you a probably dealing with a bureaucracy and may not see the same inspector twice.  In a small town the local inspector may be the entire building department.  You need to adapt to whatever the situation is.  In a large city you want to develop a good reputation so that inspectors know that you are easy to deal with.  In a small town you need to make the inspector your friend.  Making an enemy of a small town inspector can be the kiss of death for your business as can a bad reputation in a big city.

Permits, inspectors and inspections can be a big hassle.  However, they are a part of the business and learning to deal with them can make your life a lot easier.

Tact is the ability to describe others as they see themselves. - Abraham Lincoln

I made my first foray into small town real estate back in 2005.  Having been used to large suburban markets, I soon discovered that this was a different animal.  Many large markets had run amok with rampant speculation that was driving real estate prices into the stratosphere and I wanted no part of the risk associated with investments in those areas.  Through networking connections I had learned of a Nevada mining town that was experiencing an economic revival and, as a result, had a severe housing shortage. Despite the demand, prices had not climbed much but rents were high.  An investor’s paradise, or so it seemed.

The Perfect Storm

The town of Ely, Nevada had gone through years of economic decline when a mine, its primary industry, had shut down.  People left the area in search of work and houses were abandoned because there were no buyers.  Many of those who remained did not have the money to maintain their houses and they fell into a state of disrepair.  The future looked bleak for the area.

Fortune eventually shined on the area when the mine was bought by a much larger operation and re-opened.  Other industry came to the area in the form of a state prison and, not one but two, proposed power plants.  Suddenly workers were in demand but there was very little available housing.  I was one of the first rehabbers to enter the area and others soon followed.  Opportunity was everywhere.

Learning To Adapt

 On the surface you would think that people would be happy to see investment in their town.  However, it soon became apparent that outsiders were resented.  The townspeople were looking to protect their way of life and didn’t like the intrusion of the city slickers.  In many ways I could understand how they felt.

Many investors had come to the area and attempted to use their big city tactics and quickly found that they didn’t work.  The pace is slower and there wasn’t much competition between contractors since there were so few of them. To be successful in this area you had to learn how to fit in.  Those who were able to adapt thrived, those who couldn’t soon left the area.  The small town way of life isn’t for everyone.

A Different Atmosphere

It took a little getting used to but I came to love the area. The way of life is much more relaxed, the air is cleaner and the people have turned out to be terrific.  The area has seen tremendous changes in the three years that I have known it, yet in many ways it is the same as it must have been fifty years ago.  [See an article that I had published in The Ely Times ]  

Experience is the one thing you can’t get for nothing. - Oscar Wilde 

We certainly have not been focusing on our investor interviews lately and we’re making a concerted effort to change that. We’ll start with an interview with one of our active BiggerPockets contributors, Tom Cmunt.

Tom has given much of his time to help fellow BP’ers through our forums and has become a staple in the community. He focuses on extremely affordable properties in Ohio that he rehabs and rents out (typically costing much less than 1/10 the price someone could buy for even the cheapest home in Southern California, for example). We’re excited to have the opportunity to learn more about this relatively new, but successful, investor.

Meet Real Estate Investor Tom Cmunt

How long have you been investing in real estate?
I have been investing for a little over one year.

What attracted you to becoming a real estate investor?
I believe the main attraction was that I had found something that would allow me to use the construction skills that I obtained as a teenager and young adult, to make money, while still having the ability to work for myself.

Are you a full time or part time investor?
I am still working as a part time investor, although at times it feel like a full time job. There are many days that I will spend several hours concentrating on my property investment company verses working at my full time job as a Software Programmer.

How did you get started investing?
I believe my awakening came when I was trying to figure out how to get out of the every day corporate environment. After facing years of layoff’s and watching my coworkers being walked out the door, I knew that I had to figure out a way to support myself, instead of relying on someone else for a paycheck.

Tell Us About Your First Real Estate Deal . . .
My first deal was a HUD home that was listed for $24.9K. My wife and I conducted the first walk through and decided to make an offer. I knew that the home only needed around $5k to $6K to make it rentable. We offered $23K and HUD accepted the offer. We conducted a second walk through before closing and that’s when I noticed a termite problem, which is pretty much unheard of in North East Ohio.

After we started rehab we ran into several problems. When it was time to turn the gas on, they found several leaks in the basement. The plumber took care of that and we called the gas company back out. She did one final inspection only to find a gas leak in the front yard. This cost us an additional $900.00. Everything else went pretty smooth. Our renter was Section 8 which required us to do a little more rehab that I was expecting.

So, after the termite extermination and the gas leak out in the front yard, we completed the rehab for just under $8K and were only one month over our deadline. An appraisal 3 months later brought the house in at $64K. I would have no problem at flipping it quickly for $47K.

Have you ever had a real estate mentor? If so, what did they do for you?
Other then advice on BiggerPockets, none. I find most of the investors in my area are only interested in sucking equity out of a property and not looking toward building future wealth.

What is your focus (area of expertise)?
Currently due to market conditions, I am only buying and holding for rentals. I am looking at doing a flip within the next few months; I have identified several properties for under $20K, that I could flip for $35 to $40K with a minimum investment.

What do you look for in an investment?
The home has to be solid with good mechanics, in a safe neighborhood and under $20K.

How many deals have you done in your career?
I have done 3 deals now. The only thing slowing me down right now is getting funding. I have been working on an pulling cash out of my last property to purchase another for well over 1 month now; the banks have made it very difficult to obtain funding.

Do you have your real estate license?
No

What advice would you give to a beginning investor?
I see many people getting into real estate without having any idea what type of expenses they will incurred. I truly believe that all investors should have a construction or carpentry background. Everything else can be learned on the job, but if you can’t walk into a rehab and know what its going to cost you within a few thousand dollars, you really should not be in the business. I work under extreme budget measures and when I go over my estimated budget, even by a few hundred dollars I beat myself up over it. Sometimes things cannot be avoided such as a gas leak in the front yard, but a termite problem which cost me another $900.00 could have been. It was a stupid mistake, that will not happen in the future.

Now granted, I am working on $20K homes which require a lot of elbow grease and not a lot of major expenses. If you put me in a $150K home and tell me to rehab it, so it will sell for 300K, I would have to take a lot more time to figure out my budget.

What was your toughest deal?
None yet. Once I get funding, I am ready to go.

What would your dream deal be?
The perfect home that only needs a septic upgrade. I would invest $20K in a new septic and flip it for $70K more then I paid for it. It would be a simple fix that would not require much time on my part, and I would make $45K on it.

Finally, Do you have any thoughts about the current state of the real estate marketplace or economy?
Yes. As I mentioned previously, it is extremely difficult for investors to obtain funding right now. I have many deals that fit within my business plan that I simply cannot move on due to a poor FICO rating and a tight credit market.

Not From BiggerPockets: If you want to talk to Tom, you can connect with him on our social network. Additionally, if you’re interested in being interviewed for our Meet The Investor feature, please contact us.

Note: Interview Conducted March 18, 2008

Tags: flip house, flipper, HUD, landlord, meet the investor, real estate, real estate investing, rehabber, Rehabbing

You’ve been hunting for that perfect rehab deal like a Neanderthal stalking a mighty Mastodon. You’re sure you’ve found it. The after repair value and renovation costs will allow for a hefty profit. You should even be able to set a price that will result in a quick sale when the rehab is complete. There is only one teensy-weenie thing left to do – find the money to make the purchase of the property.

Back in the ancient, olden times (early 2007) it was fairly easy. You would seek out a hard-money rehab lender. Sure, the terms were steep, but the financing cost was built into the equation. As long as the numbers penciled out you could get funded. It was even pretty common to include the cost of purchase and repairs and have the interest financed right into the deal. If you did it right you didn’t need much, if any, of your own money.

Things Ain’t What They Used To Be

Here we are a short time later and the easy money is gone. Rehab loans can still be had, but things sure are different. A novice rehabber has little hope of obtaining financing at all. The experienced rehabber is facing a lending environment that has changed dramatically. No money down? Forget it. All costs rolled in? Fat chance. All repair costs included? In your dreams. These days the lenders want you to have significant skin in the game.

It’s hard to blame the lenders. They have been burned so often in the recent past that they had to change the rules. While it is easy to say that they had no one to blame but themselves, you can’t fault them for adjusting to the realities of a changing market. The rehabber has to adjust as well, unless he is going to pack up his tent and go home until things change.

What’s a Rehabber To Do?

It’s more important than ever to seek creative ways to fund a deal. If you have equity in your own home, try using a Home Equity Line of Credit, or HELOC. Lately many banks have been reducing the credit limits on existing HELOCs, so be careful there. The advantage of HELOCs are that you are a cash buyer, you can use the money as needed for the deal and repairs, and when you pay it back it is there to use again.

Can’t use a HELOC? Look for owners who are willing to hold a short-term note while you complete the rehab. A friend of mine made an offer on a house with no money down, the owner holding a note for two years and payments deferred for six months while he completed the rehab. The seller accepted the terms without a fight. It can be done.

Learn about “subject to” deals where the existing financing remains in place. This allows you to buy a property without have to obtain financing. If the seller still has equity in the property, ask him to defer taking his share until you complete the rehab and sell the property. When people are in desperate need of selling a property, they will agree to all sorts of crazy terms. Try it, you’ll like it.

Creativity Is Key

The point is to look for alternative ways of making deals happen. Instead of thinking, “it can’t be done”, ask yourself, “how can I do it?” In a nutshell, think outside the box. These are challenging times. Those who rise to the challenge will succeed.

Tags: creative finacing, financing, hard money, heloc, home, lender, property, real estate, real estate investing, rehab, Rehabbing