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.