Essentials of Borrowing
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Flip That House Style Real Estate Investing
I love those TV rehabbing shows like Flip That House. On the show people buy a house needing to be seriously updated and repaired. Usually the kitchen is heavily upgraded with new cabinets, cutting edge appliances, new countertops and more. The bathrooms are completely redone with new tile, tubs, showers, sinks and more. The living rooms and other areas usually have walls taken out to open up the floor plan and usually carpet is replaced with some type of hardwood flooring. It’s realistic to do what they show in a high dollar housing market like California to make the huge profits they usually get on that show.
In a lower priced market like Memphis, TN rehabbers are looking to make $20-30,000 per house minimum. In California and on that show they are looking for $50,000-150,000 per house. That’s because homes are so much more expensive in California where the show is produced. In a market like Memphis many of the same upgrades are done but maybe skipping the granite countertops and some other high end upgrades. In any market you are going to repaint and redo the floors.
The areas to spend the most money to upgrade are the kitchen and the bathrooms. A great value add that sometimes adds tremendously to the value of the home is if you can add a 2nd bathroom to a home with only one bathroom. While this will probably cost in the $10,000 range to do, it could increase the value of the home by $20,000-40,000 and significantly add to your profit potential. To do deals like this you need to go through several steps. First of all you have to get set up with a hard money lender as you cannot get a normal mortgage on a house in disrepair. You need to see what homes are listed for in your area and figure that when you fix it up you want it to be nicer and cheaper than all other equivalent homes on the market for that neighborhood. Working backwards from the price you could sell at to undercut the market, take out the repair costs and pad it by at least 50% for unforeseen costs(always there) and then subtract your expected profit and holding costs(interest), realtor fees(if you use), advertising and more. If you can still make at least $20k it should be worth doing. Managing your contractors is a very important part of this whole process. Ask other investors who they know and trust to come in and do your work.
Require the work to be done on time and put penalties in the contract for late completion. Don’t pay for the work up front, but agree to pay them a part like 25% as each 25% of the work is completed. One thing important to understand about these types of deals is that they aren’t super quick money. Typically the work will take a couple of months and then it will usually take a month or two to find a buyer. Hard money lenders typically loan money for 6 months as this time frame usually is sufficient to sell the fixed up home. Homes like these may be homes the sellers can’t afford to fix up or simply don’t want to fix. In real estate listings these may say things like handyman special. Foreclosure homes and bank real estate owned(REO) listings are generally good candidates. Mailing to out of state landlords can produce some homes that are good as rental homes typically need updating as they aren’t set up to sell retail.
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