I was talking to a real estate dabbler the other day. He is neither a wanna-be nor a real investor, he just purchased acouple of rental properties several years ago. He is a classic example of being lucky rather than good. He wanted to try his hand in the real estate game and was fortunate enough to be referred to an investment savvy agent that kept him from making rookie mistakes. He came to the conclusion that real estate investing wasn’t his cup of tea. He sold one property at a small profit and is still earning a positive cash flow off of the second. He plans to sell that one the next time it becomes vacant. It may be a while because he has an excellent tenant who has been there for several years already.
Our conversation centered around an upcoming talk I was going to do about rehabbing. He couldn’t understand why anyone would want to be rehabbing real estate now. Puzzled by his attitude, I asked him what he meant. His mindset was that this isn’t a good time because the real estate market isn’t appreciating so you wouldn’t be able to make money. Though I didn’t say so, I had to agree that it’s a good thing he decided that real estate investing isn’t for him.
The Wrong Time
By his thinking the best time to rehab would have been in the middle of the real estate bubble. My thinking is just the opposite. In late 2003 I moved to Las Vegas where the market was just starting to go crazy. I had successfully rehabbed for years on the east coast and I planned to do the same in Nevada. After I got settled in my new home I began to search for investment opportunities. I quickly realized that the inmates were running the real estate asylum.
I have always been a value investor. I would look for something priced significantly below the current market. That was an impossible task in Las Vegas at that time. I would look at one house that only needed minor work and another that needed a major overhaul – and they both were selling for the same price! Like any classic bubble the market had reverted to the greater fool theory – it didn’t matter what you paid because an idiot even bigger than you would gladly pay more. I put any idea of investing in Las Vegas on hold and searched for a better market.
The Right Time
One thing that has always appealed to me about rehabbing is that you make your money when you buy. Rehabbing will work in any market where value can be determined. That’s why a bubble market is so problematic, how do you determine true value? Once you determine what the value of a property is you can easily figure out if the deal will work or not. Look at your anticipated selling price, subtract your cost and desired profit, and pay no more than the amount that remains.
Simple enough, right? Of course not. There are so many variables and a certain amount of risk. It is impossible to avoid risk but it can be minimized if you manage it right. Rehabbing is not for everyone, but if it is your cup of tea it can be extremely rewarding.
Life is inherently risky. There is only one big risk you should avoid at all costs, and that is the risk of doing nothing. – Denis Waitely
Photo Credit: eye of einstein