Page one of education in real estate investing has lead you to part two. This is the plan to actually buy the house and renovate it. Your exit strategy will tell you if this purchase will be to renovate and re-sell or keep it as a rental property. Or maybe you decide this is the place for you to live. If you landed on this page without reading part one, click here to go back to that page.
So now what...
1.) Establish the true value.
What are houses selling for in your target area? If you are planning to live in the house it is important. If you are planning to re-sell it, the true value is vital. And if this will be a rental, you also need to know what houses in this area are collecting in rent.
This number will be the dollar amount you will seek to hit when you sell it, not when you first buy it. A successful exit strategy requires you to know where you want to end up before you begin the journey.
You'll add value by making this one of the nicest houses on the block. But you won't be able to add enough to sell your property for well over the going rate. Market dictates value.
2.) Economic conditions.
Is the area growing? Are jobs coming in or going away? Is there a civic plan for area improvements in the common areas? Is the local government expecting to upgrade streets and sidewalks? Or as is the case in most municipalities, are they so cash strapped they can barely maintain the current situation?
No jobs means no money to buy a new house. And probably no money to pay rent on your beautiful new property. If you intend to rent it out, you need to be even more careful. You must get references and a fresh credit report. It is really tough to get a non paying tenant out of a house.
3.) Do the walk around the block test.
This is the very best way to determine the quality of the neighborhood. Just walk around the block a few times. Not just during the day. Do it at night too. Are the neighbors taking care of their lawns? Do you get the feel that there is a pride of ownership in the area? If you can talk to the mailman, do so. They always have the pulse of the district.
Do you feel safe ambling down the sidewalk? That will tell you if this is a good area to invest. You will be trying to bring in a new family to buy or rent your renovated house. Why would they want to live there if you wouldn't?
4.) Will you be doing most of the work yourself?
Plumbing and heating are usually big jobs on these projects. If you aren't licensed in these areas, I'd say hire it out. Too much at stake to go halfway on those things. But most of the rest can be done by your self with a little research and some good old sweat equity. I loved doing all the work I could do properly. I hired out the electrical, and HVAC. Labor is a big line item in budgets. Use that money wisely. We never cut corners to save a few bucks. Quality does matter.
Here is a fantastic how to book from Black & Decker to help you save thousands of dollars as you do the much of the work your self. It is called, "The Complete Photo Guide To Home Improvement." It is very informative and easy to follow. It offers great pictures to back up the content. I've used it on every renovation and countless times on my own home. This book will really help you.
So you've done the due diligence and you know this could be a winner. How much do you bid? It all starts with that true value number you established right off. You write the offer subject to approval of the home inspection. Home inspections are critical. It is the best $300.00 you will ever spend. And it will keep you from buying a hidden disaster.
You'll use that inspection information to set a dollar figure on needed repairs and improvements. I always add a 20% cushion to that total. Expect surprises in any project. They are always there, so prepare in advance.
Add in carrying costs, such as mortgage, taxes and heat. I always figure 90 days to market and sell the property after it is ready to show. In the current market, I'd figure 180 days. Better to have and not need than to need and not have.
Add in costs of the sale both to buy it the first time and then re-sell it upon completion. Lastly put in your desired profit margin. It is an investment. You do expect to profit from that investment don't you!
All those together subtracted from your expected sale price which is the true value you established at the start gives you the maximum you will bid for this house. You will of course start lower. A lower price gives you more profit. That is a good thing. If the bank won't agree, just move on. There are plenty of used houses. The banks are hiding thousands of them. That is called shadow inventory. The market would totally collapse if the truthful amount of bank owned inventory was known.
Your advanced research of the area has already told you how much to do in renovations. You want a very nice house, but not something way above the other nice houses on the block. You don't need a crystal chandelier in a three bedroom, one bath area of town.
You do always need excellent mechanical items, such as heat, plumbing, and electrical. You need it to be fundamentally sound and very clean. We always put in brand new bathrooms and new appliances. We always added new flooring in every room.
We wanted the new buyers to be able to move right in and not have to do a thing but bring in the furniture. Every room was freshly painted. The kitchen was ready to use with great cupboard areas. The outside was inviting to people driving by and the yard space was enjoyable for the new families.
My name was on those projects and I wanted the new buyers to feel great about their home.
Be careful.. Plan and then check your numbers. Measure twice and cut once. I was proud of every house we renovated. I would have been happy to live in each one. Make that a priority and you will do fine. Use this education in real estate investing wisely. Knowledge is empowering!