When evaluating a property, real estate investors use different standards and methods. Before we get involved with a property, we look at the following criteria to see if it is worth fixing up:
"Look for the worst house on a good street."
- Whether your plan is to "flip" properties or to keep them for their rental income, you need to be able to find buyers or good tenants as quickly as possible. Keeping this in mind, you should look at homes on well-maintained streets. This doesn't mean you can only look at high-end homes. There are many "blue collar" areas where people keep their homes and yards in good shape. But a street with houses that aren't kept up well or have a lot of empty spaces doesn't make it easy to sell quickly or find good tenants.
Always keep in mind that you're putting money into this. As a rehabber, you take on a big risk and a lot of work. No matter how well you take care of your property, you can't change the way your neighbour takes care of theirs.
- Check to see if there is any damage to the building itself. This could end up killing your investment.
"You make money on real estate when you buy it, not when you sell it!"
Formula for Buying
There are many ways to buy a rehab project that will work out well. You should definitely use one. There should always be a comfortable gap between the price at which an investment property is bought and the price at which it is sold. This cushion price will help you make a good investment, even if you have to spend more on repairs than you expected or keep the property for longer than you planned. Remember that you lose money every day that the property isn't sold or rented. Interest, taxes, insurance, and bills for utilities add up every day. If you buy the house at the right price, Murphy's Law won't hurt you.
Our Funding formula:
- Figure out how much your property is worth after it has been fixed.
(Get "area comps" and look at them all. Pick out the property that has a street that is most similar to your house's street, and a structure that is closest to your house's structure, and then compare the square footage, amount of bedrooms and bathrooms that are all listed on the "comps." This will help establish a real fair market value for your property).
- Divide the ARV by.65 (After Repair Value)
(You'll get 65% of the ARV from this.)
- Make a list of all the repairs you want to make to the property and an estimate of how much each one will cost.
(This is a big deal. If you know how to fix things and have done it before, you might not need help. If you don't know how to do this, find someone who does and ask them to make a plan. Even if you have to pay a little to get them out there, this could save you a lot of money.
- Take the 65 percent value of the ARV and take away the cost of repairs. (After Repair Value) This is the most you should pay for the property. This is a safe approach that usually works well. Remember that anyone can buy a property for close to its fair market value, but with your costs and risks, you must do better!
Written by Jim Olivero
