Over the past 14 years, I have had the opportunity to work with several successful real estate investors in Salt Lake City, Utah County, Midway, and Heber City, Utah. Together, we have viewed and evaluated hundreds of multi-family homes, condotels, commercial buildings, nightly rental opportunities, and of course, single family residences. Although each of these real estate investors has their own formula for success that they have refined through their experience, there is a commonality that exists between all of them that I am going to share with you today.
1. Determine Which of the “3 R’s” Their Project Will Be
Successful real estate investors know which type of property they specialize in and predetermine which type of remodel they will do. I survey my investor clients in order to better understand how to best assist them from the beginning of a remodel so we can appropriately market their home once completed. This survey allows me to classify their project into one of my “3 R’s”, which are as follows:
Revival– This the type of remodel that involves the basics – paint, carpet, new floors, and new hardware.
Replenish – This remodel focuses on the kitchen, master bedroom, and bathrooms.
Renovation – This is the full remodel where the investor strips the home down to the studs, moves bedrooms, adds bathrooms, etc.
2. Partner with a Contractor and Manage Their Budget with Precision!
Every successful flip I have witnessed has involved a trusted contractor as a partner that can assist the investor to create an accurate assessment of the repairs that will need to be done either prior to making an offer or as soon as possible during their due diligence period. Once this is established, they work their math backwards to determine their profit based upon the ARV (After Rehab Value). A few of the costs that need to be figured into budgets are:
Interest Expense – Time is money, especially when you are using other people’s money to fund your project. Investors need to know how much they are spending per day to complete the project, market it, and sell it. The contractor and realtor should be invaluable to help with this plan prior to even purchasing the rehab property.
Rehab Costs – Success means attention to details. Small items like forgetting the cost of demo and the trash bin can cost thousands – these cannot be overlooked.
Landscaping – even if an investor simply refreshes the mulch and fertilizes the grass – this is important. I had one client who told me that, “Curb appeal is the first impression and if a buyer doesn’t like the way the home looks from the street, it may give them a negative feeling even before seeing all the beautiful enhancements you have done to the property”.
Staging – you may or may not stage the property, but homes sell better when beautifully decorated. This helps to paint the picture of what a home could look like when the buyer moves in. Depending on the price range the home is being sold in, I have seen investors choose to skip this step. Although this makes perfect sense on a home priced less than $500k in Utah, I feel this is a must for anything above that asking price.
Closing Costs - there is no way around paying closing costs. Smart investors have a title company that they work with on a regular basis and can easily find the costs to search and close their home. The title company should be part of any investor’s team.
Realtor Fees – There is a temptation to try to maximize profit by skipping over the market and marketing expertise of a Realtor. Savvy investors do not give into this temptation. A good Realtor will not only be a team member throughout the process of a rehab, but they will also front the marketing costs and handle all negotiations, transactional paperwork, and showings to name just a few benefits.
Other – Reserves for the Unexpected. There will always be unexpected expenses that need to be prepared for. Smart investors have a provision for these items and will often carry a separate expense account from one project to the next. One investor I work with said this has absolutely been the key to her success. She takes 7-10% of her profits to budget towards her reserve account. This has allowed her to stay within budget even when she has had major unexpected repairs that had to be completed.
Become Students of the Market
Experienced investors use their Realtors to constantly evaluate comparable sales in the neighborhood and keep on top of knowing what properties are selling and which will ultimately be used to determine the value of their property. If they overstep their budget, they need to make sure they can make this up with the sale of the home. Be informed and be prepared.
4. Do not rehab the home for yourself – Rehab for the masses!
Successful investors always look for what the most popular design elements, paint colors, cabinets, etc. that are appealing to the market today. I have been in design discussions with investors who ask me what the most popular colors are as well as the most popular backsplashes for kitchens. This is key because they need to market what is popular – not just what fits their eye.
5. Successful Investors do not Look for the Home Run!
Here is the situation: you know the market in the neighborhood, and you have the potential to make $100,000. You price the property accordingly, and then the home sits for 60+ days before you get an offer. During those 60 days, between interest and staging costs, you spend an additional $10,000+ which comes directly off of your bottom line. I always encourage my investor clients to price the property just under the market and move it as quickly as possible. Then take this money and do again. Consistency is key!
6. Newer Real Estate Investors Purchase the Smallest House in the Best Neighborhood
The old saying in real estate is, “Location, Location, Location”. This remains true – especially for investors. The best neighborhoods have fantastic schools and great amenities nearby. When seeking an investment, successful investors will often seek out areas that they want to become experts in and continually knock doors or advertise in these neighborhoods to find opportunities to invest in. Additionally, they will seek properties that may be smaller than surrounding homes in the neighborhood so that it has a final list/sale price that are lower than its neighbors. This allows the area to bring up the value of their investment while making it a bargain for those who cannot afford the bigger homes.
7. Look Past the Weeds and Dead Grass
Many retail buyers skip great homes simply because the landscaping is less than desirable, ugly siding or stucco makes them pause at the doorstep, or even crumbling brick or stone can make them drive away before even shutting off their car to see the inside of the home.
Experienced investors look at this dilapidation as opportunity because they realize that these are often easy fixes – especially with the more quality building materials that are available today.
8. Never Purchase on a Busy Street
The thought of trying to pull out onto a busy street or a child having to ride a bike or walk to a bus stop next to a heavily trafficked street will make buyers turn away before a showing begins – which turns into wasted investor dollars as the property sits for a longer time. Remember if a home is underpriced, there are usually a lot of issues that need to be corrected – but you cannot correct a busy street and the potential dangers that surround that street.
9. Savvy Investors Never Pay Retail
I have never worked with an investor who has paid asking price on a property. In turn, this means that investors could write between 7-10 offers for every 1 offer that is accepted. The only exception to this rule is if the investor intends to hold the property and rent it out while the market increases in value.
10. Seek the “Win-Win” While Negotiating
The most profitable investors I have worked with always seek to be open with their negotiations. Many times, newly remodeled homes have a lot of interest and as such, a lot of excitement within the community to see the refreshed look of the home. This marketing also means that there are often a lot of people who want to see the home and hopefully a lot of interest in making an offer. Many times, investors will attempt to negotiate with and make a deal with the first buyer who makes an offer. Investors realize that every day their property remains on the market means less dollars in their pocket. They are always prepared to make a deal in order to free up cash to move onto the next property.
I would love to hear your thoughts or have a discussion with you about flipping homes or investing in real estate in Utah County, Salt Lake County, Midway, or Heber City. Please reach out to me at (801) 885-2558 or by email at brandonrwood19@gmail.com.