Wednesday, October 11, 2017 / by Nicole Solari
Smart Renovations on Investment Properties: What to Fix and Why
Here at Connected Investors we’re all about smart real estate investing and exposing the real world of renovating properties for flipping or renting. What you see on TV doesn’t really play out down in the trenches. So if you’re planning your next rehab or are learning the ropes, you’re in the right place.
U.S. News & World Report published a good article about avoiding overspending on your rental property project. Dovetailing off that, we’ll break down bit by bit for the Connected Investors Community and those involved in house flipping, too.
Property Renovations: The Devil is in The Details
While most renovations will require some capital expenditure, not all dollars spent are equal. Investors should understand how to measure a renovation’s return on investment to make smarter improvement choices. – U.S News & World Report
Plan with the End in Mind
How are you going to fund your investment property? Recently new sites like CiX.comhave emerged to solve the funding problem for real estate investors. This new funding portal allows real estate investors to shop for money offered by non-bank lenders. Review our private money lending guide to learn how to fund investment properties.
Before you spend the first penny on that renovation – heck, before you even purchase the property, you should know your market and imagine the avatar of your end buyer. In our Really Flip “Fix It” workbook*, we break down like this:
What Sells to What Buyer?
Several characteristics of the property will influence the kinds of buyers your property will attract.
- Location – does the area attract families, retirees, active lifestyles? Families generally look for good school districts and less busy streets. Retirees mostly prefer to be a in quiet areas close to shopping and other amenities. People with active lifestyles like be close to where the action is or in areas close to outdoor activities. Who currently lives in the area where the property is located? This is a big indicator of who is likely to be attracted to your property and should drive the kinds of renovation choices you make.
- Size – will the property meet the needs of singles, couples or families? A 2 bedroom, 1 bath home isn’t like to attract a family – but will be appealing to singles, couples, those who are downsizing or those looking for a starter home. Think about who will want to live in the home as you plan your renovations.
- Style – Will the home meet the needs of a family or retirees? Growing families can appreciate a sprawling multi-level home. Retirees, not so much. Is there lots of garage space? Your end buyer probably has a lot of “stuff” and enjoys projects and outdoor toys. This, plus location, size and price should help in renovation decision making.
There is no clear roadmap to determine what type of renovations should be done or how extensive they ought to be. This really comes down to you, as an investor, to understand the local market and work with local resources that can assist your renovation efforts. – U.S. News & World Report
The No-Brainer Fixes
It almost goes without saying but we’ll do it anyway. Regardless of the end buyer, you have to renovate to meet local codes. Once your buyer’s home inspector steps foot on the property, there’s no going back to give your buyer a good first impression. Do it right the first time.
Getting Away from the ‘Gotchas‘
For any investor, especially the new investor, you have to be mindful of the hidden gotchas that can break the budget and turn your flip into a flop.
Do Your Homework
Due diligence is the investment property buyer’s friend. To avoid the ‘gotchas,’ it’s important focus on the big picture and drill down to identify potential pitfalls.
- The Structure(s) – What needs need work to meet code and appeal to your end buyer?
- The Infrastructure – Are the utilities sufficient? Are there existing but outdated services?
- The Land – What, if any, issue does the environment create at the location?
- The Legal – Is the land really what you think it is?
- The Authorities – What permit or other overarching authority issues could you face?
The Gotchas when Planning Your Project
Be mindful of code compliance and the costs of bringing the property up to code or making changes that require compliance to local regulations. Consult with local officials and contractors in advance so budgets and timelines are on track.
Revisit the initial property inspection and budget. Once you’ve more clearly identified your target buyer, there may be changes to the budget. In addition, code compliance can impact your budget.
Timelines are important because holding costs eat away at profits. As the target buyer is defined and additional inspections reveal additional repairs, the timeline can become compromised. This highlights the importance of thorough due diligence.
Be mindful of the value-add with each proposed renovation. The property has to appraise at resale – and if it doesn’t somebody will come out of pocket for the difference, or the contract falls apart.
This is the cliff notes version of what, why’s and how’s of renovating investment properties. Real estate investing is a lucrative endeavor – people of all walks of life and backgrounds are making a go of it. Before you jump in head first, it pays to invest the time into educating yourself and your partners.