Lessons from the Pros

Real Estate

Think You Want to “Flip” Residential Real Estate? A Few Things You Should Know

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)

Strategy number (2) is the one that excites many people, but also creates the most risk. One of the main objectives of flipping a house 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.

How to Buy Right for a Fix and Flip Investment

We spend a lot of time in class using strategies and models to qualify properties.

Finding the Right Property in the Right Area for a Fix and Flip

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:

  • A large number of foreclosures can bring down the value of a neighborhood very quickly
  • 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.

Renovation Projects that Offer the Highest Return on Investment

  • 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
  • Landscaping
    • 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.

Expected Percentage ROI on Home Renovations:

  • 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%

There is a fine balance between over-improving and doing just enough to make a property desirable so that it will sell quickly.

Good Fortune,

Diana Hill – dhill@tradingacademy.com

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

Join over 170,000 Lessons from the Pros readers. Get new articles delivered to your inbox weekly.