In the Professional Real Estate Investing class, we break real estate investing into three strategies: 1) Buy and Hold (or rental property), 2) Quick Turn (buy, fix up and resell), 3) Institutional Ownership (REITS or Real Estate related funds).
I think strategy number (2) is the one that excites many people, but also creates the most risk. One of the main objectives of “flipping” is to sell quickly and at a profit. The three keys are buy right, pick the right neighborhood and fix up for the retail buyer.
We spend a lot of time in class using strategies and models to qualify properties.
The right neighborhood or area:
One of the first considerations of many home buyers will be the education of their children. A highly rated public school system can increase the value of a home. I’ve heard it said that if a school is a National Blue Ribbon School, the value of homes in the boundaries for the school can be five percent higher than a neighboring school.
The local economy also will have a great impact. You need to do research on the local rate of employment, the industries that are growing, the industries that are leaving and the local tax base. This information will give you insight to the local economy, local being the key word.
Find out what the status of the housing market is. A couple of negative indicators to watch out for: 1) a large number of foreclosures can bring down the value of a neighborhood very quickly, 2) is the neighborhood on the upward or downward swing? You can often discern this by driving up and down the streets. I find the best time to do this is in the middle of a work day. A neighborhood should be quiet in the middle of a work day; most people should be at work, if that’s not the case, I stay away.
Crime rates can also affect a neighborhood; there are many ways to research local crime rates. One tip, go to the local store at an odd hour and see how you feel about it. Sounds simple but it works.
A study done by Coldwell Banker found that 87 percent of first-time buyers don’t want to buy a home that requires them to do a lot of work. They want the home that is in “move in” condition.
According to an article in RISMedia, when a contractor’s work totals $40,000, that increases the asking price by $100,000. This is a very broad statement but the point I’m trying to make is that putting a little effort, money and TLC can add up.
What to do for maximum return? Here are a few ideas:
- Repairing things like leaky pipes & broken windows are a must
- Replacing a roof (with a guarantee) increases the listing price
- A new driveway can really help with curb appeal
- Hardscape – walls, decks, arbors, fountains etc. Consider these carefully, they can be expensive and not add a lot of value
- Softscape – the plants – consider a color theme then use it along with a layering effect of various plants to create a custom look. It’s also nice to use seasonal plants
- Repair fences and gates
- Clean the carpets if in VERY good condition or replace
- Eliminate clutter and trash
- Paint – keep it neutral – bold or off beat colors can scare buyers off
- Refresh hardware – this can be an inexpensive way to give a new look
It’s also very important to stay within the neighborhood standards. An eight by eight closet with built-ins won’t get you the ROI (return on investment) in a neighborhood that has small closets.
So what is the ROI for fix up projects? The list below is compiled from several published surveys and shows typical payback for some popular remodeling projects:
- Kitchen remodeling – 90%
- Add a bathroom – 90%
- Bathroom remodeling – 80%
- Install central heating – 90%
- Install central air – 75%
- Add a deck – 70%
- Replace windows – 70%
- Add a room – 55%
- Build a pool – 45%
- Finish a basement – 40%
It is a fine balance not to over-improve but to make the property desirable so that it will move quickly.