Real Estate Investing “Flipping” Repairs and Renovations Often Cost More & Take Longer Than You Think
In our earlier post, How To Invest In Real Estate Without A Lot Of Cash Upfront, we explained how most real estate investment strategies require significant upfront cash or access to affordable credit. Owner financing is one of the few strategies that doesn’t require investors to tie up their money or credit to get into the game. In this post, we’ll delve into some of the unexpected costs associated with many popular real estate investment strategies — and how owner financing compares.
Even if you have the cash or access to credit to purchase a home to renovate and sell at a higher price or convert to a rental property, you’ll need funds to pay for a variety of expenses. Many who try to invest in real estate fail to estimate the actual cost associated with getting a home ready to resell or rent.
Fact 1: Repairs Often Cost More Than You Think
As a real estate investor, your goal is to find homes you can buy below market value if you plan to “fix and flip” them. Many homes selling below market value have major problems — usually, the seller experienced a financial hardship such as a job loss, family death, medical bills or divorce. When the seller suffers financial challenges, they often neglect making the necessary repairs on their homes and the houses quickly deteriorate. Houses damaged by floods, storms and wildfires (or are at risk of damage) also often sell for below market value.
Regardless of the reason, the seller typically couldn’t afford home maintenance costs and repairs. Problems with major appliances, electrical wiring, roofs, carpets/flooring, mold buildup, HVAC systems, plumbing foundation, and even lawns are typically neglected when a homeowner can’t afford to pay the mortgage or taxes.
Homes that have been left vacant for a prolonged period are prone to damage from theft, vandalism, squatters, water damage, fire and pest infestations. Often, investors underestimate the severity of the damage or discover nasty surprises such as mold/rot, code violations or outdated electrical wiring and plumbing once contractors begin repair work. As a result, repair costs can spiral upward at an alarming rate, catching many investors off guard.
Fact 2: You May Need to Do More than Just Make Repairs
As a real estate investor, your goal is to buy low and sell high, but many newbies significantly underestimate the actual costs involved with increasing a home’s market value enough to make a profit. You certainly must cover the repair costs to make the home safe and livable, but merely repairing damage or getting rid of pest infestations might not be enough to increase the home’s value.
You may need to upgrade appliances, flooring, bathroom and kitchen cabinets, outdoor living spaces or landscaping to make the property appealing enough to compete against other homes on the market. Even as a rental property, you’ll want your unit to command as high of rent as possible. It not only needs to pass building inspections, but it will also need to look updated and modern.
Fact 3: Repairs and Renovations Often Take Longer Than You Think
If you’ve ever had to deal with contractors, you know that delays and cost overruns aren’t uncommon. Permitting, bad weather, labor shortages and supply chain disruptions often cause delays. If you’re dealing with multiple contractors, scheduling problems can arise. For example, your painter may be waiting on the electrician to finish a wiring job before he can repair the drywall and paint. The painter may get tied up on another job and isn’t available when the electrician finishes.
The longer the repairs take, the longer your money is tied up in the home — extending the time before you can sell the property, recoup your original investment and make a profit. If you’re renting, you won’t be able to start collecting rent until the repairs and updates have been completed. The average time to repair a house using this strategy is about 5 months, even though your contract may often give you a much shorter estimate, the actual time is usually considerably longer than you may have planned. And each month you are paying the interest on your loan, the property taxes, the insurance, and other carry costs.
Fact 4: Owner Financing Avoids Most of these Costs and Hassles
Implementing the owner financing strategy that we will teach you, you can avoid the time consuming and expensive repairs. We usually put the house under contract with the seller, then look for a buyer. Once we have a buyer, we quickly close with the seller and then close with the buyer. We sell the properties we purchase AS IS, without doing the repairs. This allows us to work allot more deals than if you our time and energies were dedicated to managing the repairs.
Our investors also avoid the time-consuming hassles associated with contractors and rental tenants. No worrying about material or contractor delays. No middle-of-the-night phone calls saying a toilet is overflowing or that the renter is disturbing the neighborhood with loud parties! Our strategy is a win-win for all parties — the seller, the buyer and the investor.
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