Should I invest and rehab a property?

Question

Okay, I'm new to this, came into this thinking WHOLESALE. Have not made my first deal yet, but don't worry, I'm not discouraged, I know I have to keep on keeping on!

However....I've been thinking about taking out a hard money loan and rehabbing a property. I don't have my own capital to invest myself, but I do qualify for a Hard Money Loan. One that will add on the payments to the loan at the end, so I wouldn't have to make a payment during the rehab. They would also give me rehab money.

I'm skeptical, and I don't know whether or not I want to jump into this. It sounds fun and exciting, but will it really work?

My idea is that....there are ALOT of properties here in Florida that won't make it to FHA standards. I know this because I was house hunting six months ago and all I was approved for was FHA, which limited me.

Now, my credit is awesome and other opportunities have opened up. I also know, from working with people on a daily basis, that there are ALOT of people approved for FHA looking for houses right now....and maybe they can find one, I can rehab it and make it FHA standards and they can buy it from me?

I have contacts for all the rehabs that would need to be done to a property. My partner already has two rehabs under his belt, his own houses, but still, rehabs. Also, I have built a team with a realtor, investor, and mortgage lender that I trust.

People....I am young, ...and inexperienced. I'm here to learn from all of you, advice please!

Joseph M. · Answer

Don't give up...I think that your idea of fixing up homes to FHA standards could be a good one. Many REOs need repairs and won't qualify for FHA as you stated. If you emphasize that people can buy a home with 3.5% down rather than 20-25%..this would be really appealing to people.

Starting with the wholesaling is probably good advice

Priscilla Z. · Answer

Thank you all. It looks like I will get into rehabbing, just not now. From all of your advice I think I have the right idea...I just need to establish some capital so it's not so risky. I do have some capital, but it's definately not enough.

I've been trying to wholesale a couple of properties so I can get moving, but I haven't closed my first deal yet. I'm getting a little impatient, but I'm not giving up yet.

Thanks again for all your advice....I'll let you know when I do jump into rehabbing, just doesnt seem to be the right time for me now.

Elizabeth Martinez · Answer

Priscilla,

You are in the right state of mind. There are many new home buyers coming into the market every year that can only qualify for FHA loans. Plus, they do not have the money for repairs for all of these REO homes that are pretty beat. So network and figure out who would be looking for a remodeled house and determine what neighborhood people would be willing to move into. That will be your starting point.

The previous posts are right, rehabbing is one of the riskest RE investments. But the only way you are going to learn is by jumping in and unfortunatly making your own mistakes.

Partnering up on your first few deals will be good idea. Ideally you would want less risk, but that also means less profit. But the learning experience would be priceless (only if you take full advantage of it by being on the worksite as much as possible). In addition, if your partner is a seasoned vet, than he will have a system already in place. Whereas repore is already built with contractors that may save you time and money (which is what the game is all about).

The last thing I can think of right now, is buy as low as possible, with as few issues as possible (from hind-sight). Next, be very conservative with the repair budget; another thing you should shadow your partner doing. Then check out the neighborhood competition and competitively price the home to move. If you don't already have a buyer in place, advertise, advertise, advertise, and talk about it to everyone to spread the word.

Best of luck!

Jon Holdman · Answer

The key to a successful rehab project is to realize it will take longer than you expect and cost more than you expect. In the end, it will take longer to sell and sell for less than you expect.

So, you must be very conservative in estimating expenses and the selling price. This is a place to look for what's the worst that could happen when doing the rehab. As soon as you start work, you'll find work you didn't see at first. You'll have troubles with some contractor, and have to find another one to do the work.

Really would be best if you had some cash available, in some form. Could be a line of credit or a credit card, but you need to cover expenses somehow.

If your hard money lender will cover 65% of ARV, and you have none of your own cash, you need to buy at a price where buy plus rehab costs are under 55% of ARV. Otherwise, you WILL need cash of your own. You'll have up front costs like insurance, inspections, apprasial, etc. The points will come off the top. If you're paying four points plus closing costs, and purchase plus rehab is right at what the HML will lend, you'll need 6-7% of the purchase price to cover the up front costs and points.

Most HMLs want to see you pay for materials and labor, then reimburse you when the work is done.

You'll need to cover utilities, taxes (maybe), insurance, and routine maintenance (e.g., lawn,HOA) while you hold it.

You need to be sure property is actually selling. If there are a lot of pretty houses that have been on the market a long time, you might think twice. If move-in-ready houses sell quickly, maybe this will work.

Harrison Painter · Answer

I don't know....I wish I would have started rehabbing much earlier than I did.

My only concern is that you state there is no capital here. What if you get in trouble during the rehab and the hard money well runs dry?

That said, if you can have a buyer lined up, and keep a contractor to adhere to a strict budget, I might go ahead and get started.

I do not mean to sound wishy washy, but It is difficult to give a person the best advice off of one forum post.

Jeff may be correct, get a couple of wholesale deals under your belt, and sock that money into a rehab emergency fund. At least that will give you a small safety net if something were to happen during the process.

Jeff Fairchild · Answer

No, definitely do not start out rehabbing. Start out w/ wholesaling. Wholesale your properties to your partner who will do the rehabs. Seems like you need to read a few more real estate books. Ask any investor and they will tell you that rehab is about the hardest aspect of investing. Why not take a path of lesser resistance?

Jenny F. · Answer

Hi Priscilla,

I started out with rehabs and it's all i do (except bird dogging). As a fix and flip investor the most important thing i can tell you is to do your homework on the area that you are going to be rehabbing in.

Know what the comps are!
DOM
Do you have enough room after your rehab to make your asking price the most attractive in the area?
are you disciplined enough to stay on budget?
Do you have the budget for unforeseen issues that may come to light during the rehab? (get a home inspection the first few times and shadow the inspector to learn what to look for.)
KNOW your area like the back of your hand! There is nothing worse than sitting on a property too long wondering how you are going to pay for it if it doesn't sell right away.
Network with others, agents, contractors, check reputations.
You have a mortgage lender that you trust...perhaps he could direct people to your property as they get their pre-approvals...

GET SEVERAL ESTIMATES. At the end of the day it's business and what is best for business is not getting ripped off by contractors. We don't tell our subs that it's our property for flipping. If you give out too much information, you could get taken advantage of.

Should I invest and rehab a property?

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