Don’t Rehab Your House Until You Read This

Posted by JD Esajian

Those real estate investors that can hit the ground running often have the advantage. If you can start repairs and improvements on closing day, you should be able to rent or resell faster. Unfortunately, many new property investors keep making big rehabbing mistakes. Making poor rehabbing choices is never worth reducing the amount of time you spend on a property. So what blunders do investors need to make sure they are avoiding?

The Big Value Question

The biggest mistake new investors are making today is not adding real value. Few new real estate investors really understand what makes a property valuable, or not. Even fewer understand which improvements and features make a difference. You could technically put $7M of upgrades into a $1M home, and not add $1 to the resale value of the property!

5 essential considerations for all investors:

1. How is ‘value’ really determined?
2. Understanding the difference between appeal and value
3. Determining the most profitable home upgrades and changes
4. Understanding end buyers and renters
5. Accurately calculating net ROI on home repairs and improvements

Understanding Property Values

There are volumes of articles on which home improvements can help add value, or help a home sell faster. The majority of them are seriously flawed. The alternative approach is the most common form of property valuation. This is one which most individuals understand the basics of. However, it also trips up many investors. A lot don’t understand the underlying factors which can push up, or bring down values. This home valuation method basically determines a value based upon the price of other similar homes. If an identical home on the lot next door sold for $300,000; yours should be worth $300,000 too.

There are many finer elements and quirks to this methodology. Views, lot position, age, and big features like swimming pools can all make a difference. The most important factors for value are generally the number of bedrooms and the size of the property. Typically the larger it is, and the more bedrooms it has, the more it is worth. That is providing it still has comparables in the neighborhood. For example; there is no use in putting 6 bedrooms into a home when all the surrounding properties only have 3.

In many areas, the underlying land makes up most of a property’s value. Consider that if the property is worth almost as much as a vacant lot, improvements aren’t going to add much value. In some cases, tearing down and clearing a property may be considered the best improvement. But this is highly controversial.

Real estate investors must consider the ‘highest and best use’ of each property. If a home sits in the path of major development, it may be better off being re-purposed. It could be desirable for a commercial real estate developer who can put many condos or stores on the property.

Finally, consider how end buyers are now valuing properties. For example; rental homes are now being value based upon their income and cap rates, not comparable sales values.

It’s complicated. Many real estate agents don’t even understand what truly impacts property value. The more real estate investors can learn about values, the better. The more you know the better deals you will make, the more profitable your efforts will be. Improve knowledge in this area by talking to licensed appraisers and mortgage experts, and by taking appraiser and real estate investing courses.

Cosmetic Appeal vs. Appraised Value

The biggest issue is understanding cosmetic appeal versus appraised value. Few home improvements add tangible value to an appraisal. If buyers are paying cash, and are willing to pay over market value, this may not be an issue. However, if buyers will be using financing, they will be limited by the appraised value of a property.

Items like landscaping, flooring, appliances, painting, and staging offer no boost to appraised value. This means upgrading kitchens and bathrooms can often lose money. Cosmetic home improvements can be useful. If they increase appeal, attract more bids, and help a home sell faster, it can be worth it. But do the math carefully.

Understanding Your End Customer

Finding the right balance in rehabbing is all about understanding your end buyer or renter.

Will you be renting or reselling the property? The extent of repairs and improvements will depend a lot on this answer. It also matters whether the end buyer will live in the property or rent it out. Do they care more about having a beautiful place to live or value? Are you able to improve it to their tastes? Or will they gut it and remodel themselves anyway? There may be little profit in renovating some high end luxury homes. Many of these buyers will invariably gut renovate once they take over. In contrast; some mid and lower end buyers may prefer to finance a finished home, than have to find the cash to do it. Style is a factor here. For example; paying to replace siding when no buyers want to live in a home with siding panels. It may be better to leave them as is. Or to change the exterior.

Another factor which trips up many new investors is calculating the true ROI on improvements. Cost versus added value is just one part of the equation. Materials and labor are just one part of the real cost of improvements. Holding costs are a big factor. For example; putting in a pool might add $30,000 in value. But if it costs $20,000, and requires holding a property for another 3 months, it may not be net profitable at all. What about the cost of financing improvements? Are you paying interest on that money? Are you missing other buying opportunities? Would wholesaling some houses as is actually be more profitable than fixing and flipping them?

The True Value Of A Real Estate Coach

Why do highly successful real estate investors get into coaching?

What motivates real estate coaches to teach others? How much value is there in their real estate education offerings, and what should aspiring property investors look for in a good coach or training program?

Why Teach if You Can Do?

Teachers, in general, have sadly been put down with sayings like “those that can’t do, teach.” While there may have been some accusations of popular real estate authors and program vendors having little real proven experience, there are certainly others that are very clearly masters of investing in real estate.

There are also many teachers and coaches in all types of settings which have tremendous experience, and are still active in their fields, but choose to teach. There are high school science teachers that have traveled to space with NASA, and real estate moguls that have made millions flipping houses, but choose to teach. why do they do it?

While there is certainly some money to be made in providing education, and perhaps more from specialist training, the overwhelming majority of educators certainly don’t choose to teach for the size of the paycheck, or easy hours. By studying the stories of today’s real estate coaches, most will find that they are driven to share their knowledge and experience with others to help them. Those that have already been successful don’t want to keep what they know to themselves. They hold the keys to the knowledge that can help others and their families get ahead financially, enjoy more of life, and avoid the big blunders which can otherwise derail goals and progress.

Some might question the intelligence of sharing such information with others when it is so valuable. That is truly small minded, especially in a field as expansive as real estate. Some might feel they can win more if they keep information from others. The truly successful, on the other hand, know that not only is there far more real estate deals to be done in the U.S. than any one or any giant fund can handle, but a “rising tide lifts all ships.” Beyond helping other individuals succeed, the better everyone does in real estate, the better the economy does. Some see the real estate business as a battlefield of competing Realtors and investors. Others see the power and benefits of collaboration. Most individuals and companies have no need to directly compete with each other, and can find even greater success by working together.

Types of Real Estate Coaching

There are many different types of real estate coaching:

• Seminars
• Books
• Blogs
• Email courses
• Home study programs
• Podcasts
• Coaching calls
• Individual mentorship

Is There Value in it?

One of the most common questions aspiring real estate investors have today is how valuable real estate coaching is.

To answer this; it is perhaps best to first ask what value any type of education has. Why do the world’s most intelligent individuals and philanthropists give so much importance to education? Why are so many millions and billions spent on education if it has no value? Why are smart individuals willing to work so hard for so many years, and to invest so much in higher education if it doesn’t have value?

Clearly, most believe that learning is important, and perhaps investing in education is the best move to be made. With this in mind, it seems almost ironic that individuals would question the need and value of practical, financial education like real estate investing. So many years and dollars are put into learning things which will virtually never be used, and will not provide any assistance in getting ahead in life. So shouldn’t real estate investment education be even more highly prized?

There are many success stories of those that have gone from nothing to millions by investing in real estate. So many, that it is hard to ignore or discount.

Getting a reasonable about of information about an investment, business, or any financial transaction is critical for success. However, there is also a tremendous difference between just doing okay at something, and being great. This is why presidents, leading CEOs, and Olympic athletes all have coaches, and often more than one. These high performance individuals understand the value and need of a coach to become their best.

Clearly, few new real estate investors can afford to bring on a seven figure coach as if they were a pro sports team right out of the gate. However, getting the right mindset about real estate education, finding a source that is generous and credible, and committing to scaling your investment in coaching and your own success as you grow will only make things go more smoothly.

Evaluating Real Estate Tools: What Does Your Business Need?

Education may be the most important tool we all have in achieving more of what we desire. There is no question that education and training can make all the difference in the success and failure of a real estate investor. However, with so many options and paths to take, aspiring property investors ought to take a moment to consider whether they are taking the right one for their individual goals.

Let’s take a look at a few of the real estate education choices investors have:

Online Real Estate Forums

The internet serves up endless information. Much of it is free. There is probably enough to spend several lifetimes sifting through without ever getting through a comprehensive map of the real estate investment process. Free is great. Data on demand in the palm of your hand is convenient. However, many hopeful investors have allowed themselves to be pulled into using some of this as their only source of information. Specifically, some have turned to online real estate forums as their only main source of real estate investing training and education. This can mean very fragmented learning, with little evidence to back up ‘advice,’ and even some very terrible amateur information. While some of this may be extremely valuable, without a proven system, an end-to-end program, or a reputable source, new investors can find they are continually stalling and making seriously expensive mistakes.

Real Estate Licensing Courses

Licensing courses, which prepare individuals for the state real estate sales person license exam, can be very organized and compact. They can also deliver volumes of important legal information, which can have great value in staying out of trouble in the course of business. At the same time, these courses traditionally haven’t delivered much practical information or training about how to actually buy and sell real estate. These courses may be a necessary pre-requisite for becoming a Realtor, but not a real estate investor. In fact, while there is no harm in taking the course, becoming licensed and signing on as an actual Realtor has been seen as limiting by some.

Realtor Certifications

For those that do choose to become Realtors and embrace its benefits in investing, there are many more training courses served up on a seemingly endless buffet. Many can be great knowledge and skill building courses. Some will help investors stand out by specializing in certain niches. However, those that fall into the trap of never ending learning without any action, or who are simply chasing yet another set of letters to put after their names on, can find it becomes an excuse to never get started. Make sure to find balance between ongoing education and self-improvement, along with actually investing.

Old Books

Old books in general can be packed with timeless wisdom. In fact, some of the most crucial investment advice is repeated by respected billionaire investors. However, while many principles may never grow old, out of date strategies and tactics could be seriously perilous when it comes to investing in real estate. This isn’t necessarily about markets or marketing changing, it is about regulations and laws. What was legal 10 or 20 years ago may now land investors in jail for decades, even if they didn’t know they were breaking the law. Is that a risk you really want to take?

Real Estate College Degrees

Before you starting freaking out; we agree that almost all education is valuable. Despite the fact that student loans may not always pay for themselves and that many billionaires have been made without college degrees, there are advantages of going to college. You can very easily build a network, learn, and get a degree. However, that is a completely different argument than going back to college specifically to gain a real estate related degree before actively investing. Can you really afford to wait four years to start investing? How about starting investing now and using some of your profits to invest in further education?

Summary

In summary; while all of the above have value, they may not be the speediest, highest ROI, or most efficient for those that just want to get going in real estate. For these individuals, consider an organized, up to date, reputable real estate investment education course and system that can be rapidly digested.