Eager investors think about the idea of buying a rundown property and of being a real estate shark who renovates quickly and flips the property for a significant profit. Yet the discipline, knowledge and experience required in the endeavor is more substantial than first-time real estate investors would like to believe.
Make Money on Every Deal
Understanding the numbers behind a deal is crucial. Being vague about any of the aspects of a real estate deal for the purchase of a rundown property is likely to only get the buyer into deep water.
The theory that a cash-flow neutral rental situation is acceptable following the fix-up period of a rundown property (assuming it is rented out after being improved) should be questioned. This kind of thinking leads to real estate investors justifying poor rental yields following improvements by believing that all real estate rises in value significantly faster than inflation during all real estate cycles.
Making money on every deal requires either a significant margin between the purchase, renovation and financing costs, and the likely sale price, or both a healthy property re-valuation and a promising rental yield post-improvements.
What Will the Property Improvements Really Cost?
Rundown properties regularly require extensive renovations, changes to fixtures and fittings, and other improvements that can become more expensive than the initial budget indicated. For this reason, it is a good idea to get more than one estimate for every piece of renovation work to get a more accurate picture of the true costs.
Know the Local Neighborhood
Neighborhoods aren’t all the same. A couple of roads over and the whole area can be entirely different. Neighborhoods can be on-the-rise or on the way out. Unless the purchaser knows the general area or that particular street it is difficult to know whether the neighborhood is a good place to buy.
An attractive property in a bad neighborhood can take forever to sell. And often sells at a significant discount to the targeted resale price in order to get the property off the books. If the rundown property was purchased with financing in place then this additional holding period can eat rapidly into the profits that would have been realized post-sale.
Have the Right Equipment Ready for the Renovation
Usually with a rundown property there is plenty to tear down or weld together. For the smaller builders, they may not have access to stick welders or safety apparel. A company can provide stick welders which use shielded metal welding methods to weld together broken cylinders and other objects that need to be re-sealed, as well as other products that will be useful in the renovation.
Kitchens and Baths
It might surprise you to learn that what can sell a property is the bathroom and the kitchen. Outside of the living room or the den, when back from work most home owners spend a significant amount of their waking hours in either the kitchen or the bathroom. Because of this, buyers pay particular attention to the kitchen and bathroom to see how modern and well appointed they are.
If the existing design in either the bathroom or kitchen of a rundown property looks a bit dilapidated then the buyer will need to factor in replacement costs in the budget if they want to get top dollar on the re-sale.
It is still possible to get some excellent returns from investing in rundown properties, but it does take careful consideration before taking the plunge to ensure a profitable outcome.