Renovation Investing Tips You Can't Afford to Miss

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With the spike in vacant and foreclosed homes flooding the market in the years after the real estate bubble burst, there are great opportunities for renovation investors in today’s market. Television shows like House Hunters and Flip Men sprouted up, popularizing this technique, and these properties can be a goldmine – for those who know what they are doing. For those who have bought and renovated fewer than 5-10 properties, there are plenty of risks, but wise investors learn from others’ mistakes, not their own.

Understand the Local Market

If purchasing a property with plans to lease it out, landlords must think about the “Who” and “What” aspects. Who leases properties in this area? Understanding the local rental market will clarify both the potential rent of the unit and the potential vacancy rates. Who is renting determines the what – what kind of features and luxuries are expected by this specific market? Young professionals in metropolitan areas often expect luxuries like rooftop decks and Jacuzzi tubs, whereas lower-end neighborhoods may only require inexpensive carpeting and finishes. Knowing the market is essential to calculating all the relevant costs, and therefore to turning a predictable profit.

Investors should also consider if they have a sales outlet for a given property. If so, to whom? What kind of sales price can be expected, and what amenities will buyers in this market expect? Beware of investing in any property without a relatively quick and simple sales outlet, as investors never know when conditions will shift and they will need to divest, for any number of personal, financial or market reasons.

Choose Finishing Touches Wisely

From countertops to flooring, lighting to fireplaces, investors have countless options when renovating a property. Be sure to pick and choose the glamour touches very carefully. Potential tenants (and buyers) will use logic to weigh things like how well the plumbing works (when they bother to think of them at all), but buying and renting decisions are made with emotions, then justified with logic. Eye-catching features such as Jacuzzi tubs, fireplaces, patios, stone counters, walk-in closets and luxurious bathrooms are what will seduce renters and buyers. But bear in mind that each one of these features add to the renovation costs, so these glamour selling points must be chosen wisely based on the specific market.

Understand Cosmetic Problems vs. Serious Issues

It is imperative to have an eye for distinguishing the cosmetic problems from the serious ones. Is the crack in the ceiling a byproduct of a faulty structure, or merely an area where drywall should be replaced? Mistaking a serious problem for a surface issue can be a costly error when investing in a fixer-upper. Those who can look at ugly properties and determine which problems are only skin-deep can pick up houses others are afraid to tackle, and make a profit.

Prepare for Financing & Maintain Good Business Relationships
Going into a renovation deal can be both costly and logistically complex, so wise investors arrange both the rehabilitation loan and the permanent loan before placing properties under contract. If an investor does not have a pre-existing relationship with lenders, they may find themselves unable to secure financing after they have already put down a deposit and signed a contract.

Having a strong relationship with a contractor before entering renovation deal is also critical for investors. For those without one, it is a good idea to develop one by starting with small projects on rental properties that need only minor repairs and updates. At times, contractors can be difficult to work with; some are untrustworthy, some are unreliable to schedule, and most will charge the maximum price they think the client is willing and able to pay. Screen contractors extremely carefully to find trustworthy, skilled, reliable ones, as developing a relationship with them is both necessary for success and time-consuming.

Budget Realistically

One of the most important things about going into a renovation project is being realistic with your budget. Budget for every conceivable cost, and then add more. Consider less visible costs, such as the cost to carry the property through both the rehab period and the marketing period, the cost of permits, the cost of landscaping, the Realtor’s fee, the closing costs to sell it as well as buy it, and even items such as window bars if the property is located in a low-end area. When every cost is accounted for, add a cushion of 15-20% to account for unpredictable costs. Renovation projects turn ugly when an investor gets three-quarters of the way through a rehabilitation project and runs out of cash because it turns out the upstairs framing did need to be replaced after all.

It takes time to develop the expertise and relationships necessary to routinely succeed at renovation investing, so new investors are well advised to partner with experienced investors for their first 5-10 investments before attempting them on their own. There is potential to make excellent profits, but also to lose spectacular amounts of money, so investors should focus on learning skills and developing relationships first and foremost, before trying their hand at making profits on their own.

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