If you are reading this, it is nearly certain you have seen some of those rehab shows on TV that show the hosts turning a dump into a million dollar showplace, and you see all that "equity" they have earned.
As a general rule, that is not how it's done in the real world. 98% of first-time rehabbers who do it that way will lose a LOT of money, and here is the reason why (and how you can do better):
With rare exception, a renovation will never return 100% of investment, let alone more than 100%. Those rehabbers on TV have very deep pockets behind them - the sponsors and the station have to get ratings. They can only do that by using sensationalism. To them, it is advertising costs designed to bring in revenue. They do not care about the cost to create a silk purse out of a sow's ear. They don't really care if they cannot sell it for a profit (or even at a loss). But if you know the secrets of pro rehabbers that are not on late night TV, you can make a ton of money. But first, understand this important fact of renovating a house:
It is difficult to get a dollar back for a dollar invested. For example, one of the most expensive parts of a full UPSCALE rehab (as done in those shows) is the bathroom at an average cost of $57,411. But the added resale value on average is just $32,998 - a LOSS of 42.5%. For every dollar invested you get 57.5 cents back. Overall, the cost of a full rehab of a home will only add roughly 64% to the resale value - meaning you LOSE 36%. That's fine if you have a TV show backed by big bucks and you don't care if the place will sell at a huge loss. Sure, they will tell you they turned a $200K home into a $500K show piece and therefore "made" $300K. But what they do not tell you is they paid out $400K in rehab costs to make that $300K in equity, so they lost $100K - they paid $200K for the house plus $400K in rehab = $600K for a place that MIGHT sell for $500K.
So, how DOES an investor make money on a rehab? The secret lies in choosing properties where the necessary renovations are mostly cosmetic that can be done quickly with little cost. NOT knocking out walls, adding dormers or installing stuff that only the wealthy can afford. Understand - the longer the rehab takes, the more it costs - property taxes, insurance, mortgage principle and interest, electricity...
The first thing one must do is evaluate the property before buying it. First and foremost, ideally it should be the worst house in a nice middle-class neighborhood. Middle class buyers outnumber wealthy buyers 10-1, so it will be easier and quicker to resell. Then, keep the home in line with the neighborhood - if you build a mansion in a neighborhood of $200,000 homes, you will lose a fortune - people who live in a $200K neighborhood cannot afford a manse, and people who can afford a manse don't want to live in a $200,000 neighborhood.
Avoid buying anything that has structural issues. The free ebook "The Simple Man's Guide to Buying An Older Home" shows what to look for, and how to evaluate the potential. This ebook is one of several books that can be downloaded free from "The Simple Man's Guide to Real Estate" website.
The next thing one must do is get a real bargain on the property to be rehabbed. "The Simple Man's Guide to Real Estate" shows a number of ways to accomplish that, along with pitfalls to avoid. It also shows how to determine a fair purchase price based on a tried and true formula, to insure you do not overpay.
Use salvage (salvage yards are in nearly every community) where it does not show - once painted or sanded, old salvaged boards look new. Also use salvage to create "old home charm" that adds value above the cost - a refurbished clawfoot tub as an example, or an old fireplace mantle.
One thing that usually adds more value than it costs - a new front door, and nice landscaping. Curb appeal is important - first impressions mean a lot. Also add mirrors in the home - they create a sense of more room, and they reflect light, making it brighter.
There are a lot of things you can do to add value to a home and make yourself a good profit. A great way to begin is to turn off those house flipping shows and pick up a copy of "The Simple Man's Guide to Real Estate".
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