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Thinking Long-Term
Many professional real estate investors view flipping as a short-sighted approach to the business. Virtually the only advantage, Jones-Cox says, is a quick profit, but the capital gains taxes eat a big chunk of that—and the current market conditions aren't conducive to a speedy sale. Plus, rehab projects are notorious for taking longer and costing more money than anticipated. It's far better to hold the house and enjoy the long-term benefits.
Davis, who has flipped seven houses in one year, agrees, saying, "I made $10,000 to $12,000 per house and thought I was pretty hot stuff," he says. "It was the dumbest thing I ever did. If I'd kept them as rentals, I'd have $1.5 million in equity by now."
Perhaps the smartest way to approach rehabbing right now, especially for the new investor, is to buy a house as an owner occupant, live in it for two or three years while fixing it up and then sell it for a profit. You'll get a better interest rate on the financing, eliminate the larger down payments required of investors and the hefty capital gains tax that flippers pay on the houses that they buy and sell quickly, and give the house time to experience some appreciation."That's a pretty spectacular strategy to make $50,000 or $100,000 and not pay taxes on it," Jones-Cox says.
Making the Right Renovations
Once you find the house, you need to make a renovation and repair budget. The first step is establishing an approximate sales price. That's accomplished by running a comparative market analysis of houses similar to the one you're selling in location, age, square footage, bedroom and bathroom count, age and features. Look at the prices of the houses that are selling—as well as the ones that have been sitting for months, recommends Dean Graziosi, a Tempe, Ariz.-based real estate investor and author of The Real Estate Millionaire. That will give you a good idea of what to include in your rehab.
Then, deduct how much you paid for the house, your other expenses (such as a real estate agent's commission) and the profit you'd like to make. "That will tell you how much you can spend," he says. The repair rules for rehabs are quite similar to those recommended to home buyers getting their own house ready to sell: First impressions are critical, so pay close attention to the front yard, the exterior of the house and the entryway; kitchens and master baths sell the house; don't impose your decorating style on the buyers; and keep colors in a neutral palette so buyers can make it their own.
The biggest mistake Jones-Cox sees investors make in their rehabs is spending money on upgrades that don't add value and aren't appropriate for the neighborhood. "They get into these properties, fall in love with them and think it would be great to put a hot tub in the bathroom of a $125,000 house," she says. "They're not reasonable about what should be done, go way overboard and never get their investment back."
Diane Saatchi, senior vice president of The Corcoran Group, a real estate firm based in East Hampton, Long Island, N.Y., sees the same thing in multi-million dollar rehabs. "Sometimes people overspend in ways that are not that important," Saatchi says. "Someone will put in an expensive generator and not have enough closet space or storage space for the size of the house. Or, they'll do something that doesn't suit a neighborhood. If it's a neighborhood where all the houses all have garages and you turn the garage into an exercise room, that's stupid."
If you think like successful real estate investor and consider flipping or rehabbing as a long-term investment, you're more likely to succeed.
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Text by Pat Curry
© 2008 BobVila.com
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