Having brokered over 2,000 houses in my career, I have worked with investors as they experience the highest highs and also the lowest lows. Here are 5 valuable tips for anyone considering using real estate to make money:
1). I’ve seen one of the most important ingredients to a successful investment is how the investor manages the rehab. As I have said many times before, an investment property needs to be focused on the numbers and aiming for a profitable investment. What I have seen time and time again are people that are new to investment real estate looking at a house as if it is a reflection of their character. Rookie investors many times complete unbelievable rehabs and rehab a house that is fit for a king. Spending $30,000 on a tile roof, $18,000 on kitchen cabinets and $12,000 to put granite on every surface in the house, these strategies produces a house that the investor can be very proud of, but their finished product is typically the exact opposite of a profitable investment.
2). While you might have a full-time job and may have very limited time to spend on the rehab of your project, it is important that you at least stop in to check on your contractors and take a look at the project, preferably make appearances at the property while your rehab crews are there working. Accountability is a very important, but also a touchy subject. You need to keep an eye on everything your contractors are doing and you need to let them know if their work is not up to your expectations. Many times, I have seen investors hire a contractor, pay them $12,000 and not go inspect the property until the job was done and it lead to shoddy workmanship that did not meet the investor’s expectations. It is much more efficient, considering both time and money, to stop in on the investment and meet with the crew at least three times per week.
3). While I always tell people not to overspend on things like kitchen counter tops, kitchen cabinets and hardwood floors, I am always open to investing money into the structure of the house. I am always open to investing money into the supporting structure and internal items of the house. While items such as the heating and cooling, electrical system and plumbing are not glamorous items that your buyers will enjoy looking at, these are items that make a house function properly and save many headaches down the road. It is important to invest money in these items because cutting corners on these items always leads to much larger expenses down the road. As an investor, you will also sleep better at night knowing that you delivered a good home in top condition to your buyers.
4). How to negotiate rehabs. A very tricky part of real estate investing is how you handle your contractors and how you negotiate with them. You have to be prepared for anything as some contractors underbid a project and you are caught with surprise expenses down the road, and other contractors may see an opportunity to make a lot of money off of you because you don’t know every detail of construction. I do have a solution. I recommend getting two quotes from two different contractors for each major item you need fixed on the house. What that means to me is if you need new air conditioning installed you need to meet two different air conditioning contractors at the project not only explain to them exactly what you want done and how you wanted done but when they give you their final quote, the most important part that you can do is ask them to break the estimate down and explain how much are they spending on each material, how much are they spending in labor, how much a reserve they have built in for things that may go wrong. In my experience, I have been able to get lower numbers out of contractors by breaking down each item and finding things that they had unreasonably up charged. Talk about the rehab process related to the estimate, ask questions about the estimate and don’t be afraid to ask questions about pricing for these items if you see a large charge, maybe 3500 for an AC system, don’t hesitate to call a heating and cooling company and ask them how much that exact system would cost.
5). Be careful who you get advice from an don’t get caught up in the moment. I have been to many rehab projects where an investor brought several friends along with them. Everyone gets excited and caught up in the moment and starts throwing in ideas, and before you know it a $10,000 rehab becomes the $30,000 rehab and includes many lavish items. A lot of times, these conversations go down the road of making a man cave. You have to stay focused, only take advice from experienced investors, take limited advice from your contractors and always listen to Realnet associates who have experience in rehabs. The focus is on creating a good house structurally, while appealing to a large portion of the population. Three bedrooms is always good, never convert a bedroom into a den or office. Bedrooms are valuable. Also, no matter who you take advice from, I recommend sleeping on it before you make a decision if at all possible. Give yourself a few hours to think about a decision and you’ll usually come out making the most efficient decision possible, and one that will give you the best final product at the most affordable price.
Other than buying the right house, I think that the way in which you rehab a house is the most important ingredient to a successful investment. Be careful and don’t get caught up in the moment. Don’t overspend, pay attention to who you’re taking advice from and run your ideas past Realnet experts. Using these techniques, you will be able to make your first investments profitable and you will learn a lot from them. You will be able to stay in the real estate game and become an expert where you can really start to make great money.