Renovating For Profit

The Home Investor Ten-Step Renovation Program.

"Nothing great was ever achieved without enthusiasm." Ralph Waldo Emerson

Step One: Realistic skills assessment

Begin by determining what skills you have that can (and should) be applied to your renovation project. If your project is strictly an investment, you need to consider the cost of your time in terms of how much you can earn an hour by doing other work (perhaps your main employment). If you can earn $100/hour as a computer programmer, don’t give up time you can use writing software to do a $15/hour laborer’s job on your renovation project. By working on your software, you can easily pay a contractor to do the $15/hour job and still have $75/hour in your pocket. However, if you find renovating to be a relaxing diversion from your income generating work, you might justify some time spent on the project as relaxation.

If money is tight on your first project, you will probably take on more work yourself, otherwise plan on contracting as much of the work as you can so your project gets done on-time and you can reap the rewards by selling the home sooner.

So in step one, figure out what you should do yourself and which jobs will need to be contracted out.

Step two: Set a project budget

Before entering into any project, you should know where your funds will come from to purchase and complete the renovation project. You will typically need money for the down payment on a purchase as well as funds to cover whatever loan payments you need to complete the purchase. You will also need to fund the work to be done. Sometimes a seller is willing to take back a loan note on the property in order to help sell it if it is in particularly bad shape.

At this stage we do not know what home we will be buying, so our budget might look something like this:

This step is essential before moving on to step three. If you need to get seller financing, factor it into your budget at this point; if you need pre-approval for a first or second loan, get it now, before you start hunting for your first project.

Step Three: Locate target homes

Note home[s] plural; you need to find more than one home so you have options to consider and you will not feel forced into a weak deal. At this point (or before) a good Home Investor Specialist™ or Realtor® that specializes in working with investors can save you a great deal of time.

In searching for good rehab properties, remember the recommendations introduced in previous editions of The Home Investor (see also www.USHomeInvestor.com) and look for homes with one or more of the following criteria (typically the more the better):

•          The worst house in the best neighborhood / town

•          Overgrown yard with no signs of care

•          Peeling paint on trim and siding

•          Houses painted blue or brown

•          Terrible interior decoration (e.g. bad taste or simply old & worn)

•          Broken garage doors

•          Broken or rotted windows

•          Rotted trim

•          Poor interior room layout

These problems will deter many buyers but are relatively quick and inexpensive to fix.

For the more adventurous, also look for the following:

•          Old / missing kitchen

•          Dirty / old / broken bathrooms

•          Leaking roof

•          Old wiring that needs replacing

•          Heating / plumbing problems

Although these problems are more complicated and costly to fix, they are still relatively easy.

In most cases, it is a wise investor who avoids any of the following:

•          Damp / wet basements

•          Active termite or carpenter ant infestations

•          Cracks in the foundation walls or floors over ½ an inch (even smaller cracks may indicate a serious problem).

•          Asbestos

•          Very bad locations

These problems are often costly to remediate and sometimes impossible to fix altogether. (Note: you can’t make a silk purse out of a sow’s ear i.e. a bad location will always be a bad location no matter what you do to the house).

The golden rule is to think of the home as being made up in layers. The most important layer is the skeleton of the house. If this is solid then the visible layers can easily be modified to make them more appealing to buyers.

When you see a home that matches your criteria it is not always for sale. Inquire with the owner to see if they would be willing to sell (or better still, ask your Home Investor Specialist to inquire for you). Often homeowners with this type of property put the home on the market to sell it at an unrealistic price. If this is the case, make a low offer by all means, but keep an eye on the property. If it is still unsold after five or six months, make an even lower offer; you may be surprised at the results.