Rehabbing a house is one of the most popular exit strategies in real estate investing. Real estate investors of all backgrounds and starting points have come to know the benefits of real estate rehabs. To start rehabbing houses, carefully lay out your goals and identify which rehab type best aligns with your situation. Learn the process before taking on your first project, and don’t be afraid to start small. In this article, we will go over some common problems buyers face when rehabbing a property.
1. Finding the right property
One of the biggest challenges real estate investors face when buying a property for rehab is finding the perfect real estate to invest in. A new investor will face several problems when starting, and lack of access to property listings is one such problem. When new to the market, you will most likely have no prior connections or networks in the real estate world, making it challenging to locate the best properties. Connect with renowned and verified real estate agents to learn about possible investment opportunities.
2. Inaccurately Calculating Project Costs
Poor estimations are typically the result of a lack of preparation and education. Investors are advised to conduct their due diligence to mitigate any risk of performing a wrong estimation. Impatient investors often need to accurately calculate repair costs before bidding on a house. Inaccurate repair costs may impact any ROI you hope to attain. As a rule of thumb, expect repairs to cost more and take longer than anticipated. It is essential to understand how much time and money you will need.
3.Failing to maintain the property after the rehab
You have completed your rehab and are ready to sell it. All your hard work is about to pay off. However, it is not the time to let your guard down. There is still work to be done. Sometimes an adequately rehabbed property won’t last more than a couple of hours on the market. However, there is still a possibility of the home staying on the market for longer than expected. In this scenario, many investors make a common mistake- neglecting to maintain the property while it is up for sale. Over time, even the most excellent properties can begin to look uninviting. Maintaining curb appeal is just as important as creating it.
Investor Loan Source, a private money lending company, provides high-quality investment property loans to private real estate investors at the lowest costs possible. Our process for providing real estate investors with private lending is unique. We place emphasis on the hard asset and value of the collateral (property) and less on the borrower. Our asset-based real estate investment loan model means we can provide more money lending to more investors than is available from standard bank loan models. At Investor Loan Source, providing real estate investors with hard money loans is our business; it’s all we do. We offer several business real estate loan products designed to serve a variety of investors and property profiles, including private money lending for properties to sell on owner finance.
Fixing and flipping houses is a fascinating business. By establishing this new venture, you may be able to substantially increase your income-not to mention you’ll also develop investments that will allow you to reach financial freedom. By following this fix and flip guide, you may be able to engage in more effective investments.
1. Understand the Local Market
Knowing your local real estate market’s trends can help you make projections on its current state and how it will change. The market will give great insights into what features are worth improving on your investment property.
You will also know the market forces impacting your property and how they affect your business. Consider attending real estate seminars and networking with other investors to access reliable projections on what will likely happen in the property market.
2. Understand the Fix and Flip Process
Being a flipper is about more than finding cheap properties and selling them for a profit later. It’s also about doing the necessary repairs on the property, finding contractors to help you with these repairs, and managing those contractors.
Some investors may hire general contractors to fix the property, but others decide to do all the work themselves. Consider finding a business partner who knows the best methods for performing DIY renovations. You may find ways to save money on renovation supplies and other costs that come with house flipping.
Find someone to help you manage the business at its early stage. The best option would be to find an experienced real estate professional who can help manage and maintain the property until you can sell it for a profit.
3. Have a Business Plan and Budget
Before spending money on the property:
Prepare a detailed business plan.
Make sure your plan is realistic and possible to achieve.
Don’t make assumptions about the cost of repairs and other expenses.
Take several quotes from real estate agents about similar properties in your area and use them to benchmark for future estimates.
Additionally, it would help if you listed all costs, including maintenance, taxes, and insurance payments. Once you have everything on paper, compare your income and see if you can make monthly payments without jeopardizing your financial situation.
4. Get a Private Money Loan
Once you’ve identified your property, have a business plan, and know your budget, it’s time to get the financing needed to complete the project. A private money loan may be the perfect financing option for fix and flip properties. The fix and flip loans usually come with the fastest turnaround time, and the money you get is pooled from private investors (not Wall St. or large banks).
Bottom Line
The decision to fix and flip a house can be an excellent opportunity for anyone looking to venture into real estate. Always understand that you may go up against other investors with more experience and capital as a beginner. However, it pays to heed the wisdom of experienced pros who may point you in the right direction when you need help. Finally, remember that there are benefits and risks in any investment. Always do your due diligence and take the time to learn from other investors who have been there before you. Don’t give up when you encounter problems in your first real estate deal; instead, learn from your mistakes and move on.
Disclaimer: The information provided is not investment, tax, financial or legal advice. Consult with a licensed professional.
Investor Loan Source, a private money lending company, provides high-quality investment property loans to private real estate investors at the lowest costs possible. Our process for providing real estate investors with private lending is unique. We place emphasis on the hard asset and value of the collateral (property) and less on the borrower. Our asset-based real estate investment loan model means we can provide more money lending to more investors than is available from standard bank loan models. At Investor Loan Source, providing real estate investors hard money loans is our business; it’s all we do. We offer several business real estate loan products designed to serve a variety of investors and property profiles, including private money lending for properties to sell on owner finance.
Over the last year, we have seen a massive increase in interest rates on DSCR loans. DSCR stands for debt service coverage ratio and is one way the lender analyzes a loan. Real estate investors use DSCR loans to build a rental portfolio. Credit score, experience, loan-to-value, and asset type are other factors used to analyze it.
Let’s examine how a DSCR loan came to be. Most generally, hard money lenders and real estate mortgage brokers will sell these loans to real estate investors utilizing the BRRR strategy, which stands for buy, rehab, rent, and refinance. The BRRR strategy has been widely talked about over the past few years, and with rental rates rising and interest rates being so low, this has become one of the most popular strategies in real estate investing. These loans are usually brokered to a handful of large national non-QM lenders using warehouse lines of credit as their capital. The DSCR loan makes up as much as 40%-60% of the business for hard money lenders today, and this may be changing quickly.
The DSCR loan capital comes from Wall Street. Aggregators will generally write loans using their warehouse lines of credit. Then, they will pool hundreds or thousands of these loans together into a product known as a mortgage-backed security. These will be purchased by institutional asset managers like REITs, pension funds, insurance companies, etc. The purchasers of the mortgage-backed security DSCR loan packages are looking for a fixed-rate investment, something they can count on. It is an alternative to US treasury bonds, other types of bonds, and even conventional mortgage-backed securities written on owner-occupied properties. As inflation has soared out of control, investors are demanding higher returns. Uncertainty in the real estate market also commands a higher return. Lastly, the cost of capital is climbing with rising interest rates, which also increases rates on the DSCR product.
The spread in value between conventional mortgage-backed security and a DSRC mortgage-backed security has risen to double what it was recently. In the past, you could expect a rate differential or value differential of anywhere from 75 to 100 basis points, and now that differential has risen from 1.5% to 2%. Because of this, coupled with rising interest rates, the interest rate charged on a DSCR loan has doubled over the past year. A quick internet search on DSCR loan interest rates shows advertised rates anywhere from 7.5% to 8.5% on a 30-year DSCR loan at a 75% LTV and a 1.2 DSCR. Of course, this hinges on good credit of over 720, and any of those missing factors will make that interest rate climb even higher.
So, the question for real estate investors is this: can I purchase a home today, rehab it, rent it out, and then refinance at an interest rate that still allows me to cash flow on my rental property? The short answer is no because that process takes time. Depending on how much rehab that house will take, it could take months to complete. With rates rising as quickly as they have, it’s challenging for us to predict where interest rates will be once your property is ready to refinance.
If rates climbed another full percentage point, would your property still cash flow? If so, maybe you take the chance, perhaps you can make it through, and possibly the deal still cash flows for you. But if you’re buying at the peak of prices, where people are bidding against each other for this property, it may not make sense to continue the BRRR strategy. If you want to move forward with this strategy in such an uncertain and volatile time, my first advice is to make sure you have a lot of cash available to you in case you have to cover a negative cash flow for a while on your new rental property. Number two, I would also make sure you’re buying deep. In other words, the days of buying at 80% of value or 1% rent-to-price ratios are over. Those properties are not going to cash flow at these higher interest rates going forward. Buy it deep. Paying too little will never hurt you in real estate investing but paying too much certainly will. And third of all, buy deals that have a very short timeline. In other words, a quick rehab and a solid rental base so that you can rehab it quickly, fill it quickly and refinance it quickly as rates continue to climb.
With the most recent PPI and CPI numbers this week (Oct. 14, 2022), the FED is almost certain to raise rates again. While the Federal Reserve rate does not necessarily impact the 30-year owner-occupant or conventional mortgage rate as much as it does other loans, a DCSR loan is not a conventional one. It is considered a commercial loan and is directly affected by the FED funds rate. Any increase by the FED can almost guarantee that DSCR products and hard money products will rise accordingly. It may not be a point-for-point rise, but it will rise. Over the coming months, I would expect the rates on DSCR loans to get as high as 9% and 10%, which rivals what we were paying for hard money rates on the fix and flip loans not that many months ago.
In my humble opinion, this will kill many DSCR lending programs. This market shift will shift the focus of hard money lenders from the rental loan programs they broker to the fix-and-flip product—their flagship (and most profitable) product, to say the least. The national non-QM market is filled with undercapitalized lending companies that will not be able to navigate the changing market with current capital reserves and will fold under the pressure of rising rates. Let’s face it; their rates were the only thing they had going. Once that is gone, the writing is on the wall.
Buying rental property is always a good strategy if it is purchased at the right price and you have available capital at a cost that allows your property to be profitable. My suggestion is to get to know local lenders and build a network of local capital. That could include local banks, local hard money companies with their own DSCR programs that are not brokered, and private money investors. The cheap national companies provided a great opportunity for a time but continuing that reliance may prove to be detrimental to your growth. Having a plan B in case your lender leaves you at the closing table is a good strategy in any market, this one in particular.
Investor Loan Source, a private money lending company, provides high-quality investment property loans to private real estate investors at the lowest costs possible. Our process for providing real estate investors with private lending is unique. We place emphasis on the hard asset and value of the collateral (property) and less on the borrower. Our asset-based real estate investment loan model means we can provide more money lending to more investors than is available from standard bank loan models. At Investor Loan Source, providing real estate investors hard money loans is our business; it’s all we do. We offer several business real estate loans products designed to serve a variety of investors and property profiles, including private money lending for properties to sell on owner finance.
First-time real estate investors should keep in mind that it’s not a sprint, but a marathon. No one can expect to succeed right away. Be patient, do your homework and consider the long-term payoff when you make the jump into investing. In the video below Natalie Larson, CSR Manager of Investor Loan Source, shares tips that may help new real estate investors get started on the right path.
Investor Loan Source, a private money lending company, provides high-quality investment property loans to private real estate investors at the lowest costs possible. Our process for providing real estate investors with private lending is unique. We place emphasis on the hard asset and value of the collateral (property) and less on the borrower. Our asset-based real estate investment loan model means we can provide more money lending to more investors than is available from standard bank loan models. At Investor Loan Source, providing real estate investors hard money loans is our business; it’s all we do. We offer several business real estate loans products designed to serve a variety of investors and property profiles, including private money lending for properties to sell on owner finance.
The key to investing in real estate is first determining what type of real estate investment is suitable for your portfolio. There are different types to consider, each with unique benefits and profitability. To help you decide which investment to pursue, we have outlined a few options for real estate investors.
Residential Real Estate
Residential real estate is probably the most widely known real estate investment. Here are a few property types to consider.
Long-term rental property: A long-term rental property is a piece of real estate you buy to rent out to tenants. This property can be anything from a multifamily apartment building with multiple units to a small, single-family residence.
Vacation rental: This type of investment is like owning a long-term rental property. You buy a property, typically in an area popular with tourists, and then rent it out to visitors who stay in it for a short time.
Fix and Flip: Flipping a house is one of the most active investments you can take on. When you flip a home, you purchase a fixer-upper in desperate need of repairs, then make improvements to sell it at a profit.
Commercial Real Estate
Commercial real estate refers to real estate investments that are typically non-residential. Offices, warehouses, and shopping strips are examples of commercial real estate investments. Down payments and monthly rent payments on commercial rentals can be higher than residential properties. It may also take longer to fill vacancies.
Bottom Line
If you’re considering investing in residential or commercial properties, doing your due diligence requires more than coming up with a down payment. Knowing your local market is also essential. Property values may decrease if there isn’t much demand for homes or commercial space in your area, and that investment could quickly become a burden. Always do your research and reach out to your ILS team should you have any questions.
Investor Loan Source, a private money lending company, provides high-quality investment property loans to private real estate investors at the lowest costs possible. Our process for providing real estate investors with private lending is unique. We place emphasis on the hard asset and value of the collateral (property) and less on the borrower. Our asset-based real estate investment loan model means we can provide more money lending to more investors than is available from standard bank loan models. At Investor Loan Source, providing real estate investors hard money loans is our business; it’s all we do. We offer several business real estate loans products designed to serve a variety of investors and property profiles, including private money lending for properties to sell on owner finance.
Due diligence is an integral part of any real estate investment. Performing due diligence ensures real estate investors know exactly what they’re in for with a property. Buying a property can be costly. The correct information is essential when making an important decision. In simple form, due diligence involves the examination of every aspect of a property that could affect its suitability or value. In this article, we share three tips that may help real estate investors during the due diligence process.
Do a Title Review
Title reviews are fundamental to the due diligence process. A title review is like a background check for a property. When an investor is considering acquiring a property, the title review process confirms the seller owns the property and provides an overview of all rights affecting such property. Investors should also get a preliminary title report on any foreclosure property they’re interested in buying and look for any secondary liens or tax liens. This may help investors know that there are no hidden liens or encumbrances on the property that could turn into unpleasant surprises later.
Inspect the Investment Property
Property inspections are an important part of the due diligence process. Real estate investors may have a licensed professional inspector examine the house for structural defects, water damage, or other significant problems. Pest inspections are also reasonably standard for termite damage. Electrical inspections are suggested for older properties that may need rewiring after many years. Lastly, plumbing inspections will check for sewer leaks and drainage issues.
Analyze the Location of the Property
The location can significantly affect the value and desirability of the property. As such, due diligence includes looking at the environment and location of a home. Real estate investors may get to know the areas they’re considering buying in. Driving around the neighborhoods, looking at other houses and people who live there, and talking to residents may also help to understand if property values are going up or down. It’s also a good idea to check out crime rates in areas looking to buy. These factors can significantly impact which markets to buy and which to avoid. These tasks are part of the due diligence, even before making an offer on a property.
Investor Loan Source, a private money lending company, provides high-quality investment property loans to private real estate investors at the lowest costs possible. Our process for providing real estate investors with private lending is unique. We place emphasis on the hard asset and value of the collateral (property) and less on the borrower. Our asset-based real estate investment loan model means we can provide more money lending to more investors than is available from standard bank loan models. At Investor Loan Source, providing real estate investors hard money loans is our business; it’s all we do. We offer several business real estate loans products designed to serve a variety of investors and property profiles, including private money lending for properties to sell on owner finance.
Tom Berry, Co-Founder and CEO of Investor Loan Source, recently shared his thoughts on the power of self-discipline. He shares tips and stories to help real estate investors make better decisions when it comes to purchasing investment properties. Click the video below to view the entire presentation.
Investor Loan Source, a private money lending company, provides high-quality investment property loans to private real estate investors at the lowest costs possible. Our process for providing real estate investors with private lending is unique. We place emphasis on the hard asset and value of the collateral (property) and less on the borrower. Our asset-based real estate investment loan model means we can provide more money lending to more investors than is available from standard bank loan models. At Investor Loan Source, providing real estate investors hard money loans is our business; it’s all we do. We offer several business real estate loans products designed to serve a variety of investors and property profiles, including private money lending for properties to sell on owner finance.
A knowledgeable contractor’s help can enormously help organize a flipping project and provide insight into what is possible with a property. A contractor may guide real estate investors with what type of changes they want to make and if they will be helpful or damaging. Additionally, a contractor will help investors oversee the home renovation project and keep the process moving. This is especially helpful if the house flip is a side job rather than a primary occupation. The contractor should also help real estate investors with financial planning. They should be able to tell how long the job will take, when the draws are needed, and how much the material and labor will cost the investor.
Furthermore, a contractor should also manage getting permits and inform how long the permitting process will take. They will also know what work can be done without permits and which jobs will require them.
Using a contractor will cost more money than doing the project themselves, but it will save real estate investors time and money throughout the project. While owning the property, investors will pay several monthly costs, including real estate taxes, utilities, insurance, and maintenance. On top of the monthly interest from the loan, these costs all add up to significant numbers that can be the difference between the project’s success or failure. A job completed correctly is less likely fail an inspection and incur fines. Hiring an organized contractor will keep the real estate project moving, effectively reducing costs over the project period.
Ultimately, investors can split the work with a contractor. They might be good at painting walls but not good at laying tile. Real estate investors might consider splitting the work with a contractor. Explain from the beginning what they can do and what they expect from the contractor. Real estate investor should make sure they have that in writing and spell out each party’s responsibilities clearly, so there are no misunderstandings.
Investor Loan Source, a private money lending company, provides high-quality investment property loans to private real estate investors at the lowest costs possible. Our process for providing real estate investors with private lending is unique. We place emphasis on the hard asset and value of the collateral (property) and less on the borrower. Our asset-based real estate investment loan model means we can provide more money lending to more investors than is available from standard bank loan models. At Investor Loan Source, providing real estate investors hard money loans is our business; it’s all we do. We offer several business real estate loans products designed to serve a variety of investors and property profiles, including private money lending for properties to sell on owner finance.
Finding house to flip can be difficult. But that doesn’t mean you should jump at the first opportunity you come across. An investor needs to know how to choose the right property. In this article, we will explain a three steps that may be used to evaluate a fix-and-flip project.
Evaluating a Home’s Interior
Walk into the space and look at the floors. Are there any stains or tears in the carpets? Will they need to be replaced? How are the walls? Are they damaged or in need of painting? Each of these problems can be an indication of water or structural damage. You should also investigate the kitchen. Are there any tears, stains, or cracks in the tile? Do the floors need to be replaced? Can the cabinets and countertops be salvaged, or is time to upgrade them?
Many real estate investors spend most of their budget in the kitchen. It may be the most expensive room in a house to remodel. If done right, the kitchen may also give you the most return for your buck.
Evaluating a Home’s Exterior
Excitement can sometimes lead you to overlook important details when evaluating your potential fix-and-flip deal. Take the time to inspect the entire exterior and yard thoroughly, even if the interior is in good shape. While inspecting the exterior, look for cracks and sagging windows or doors. These could be signs of settling in the foundation and could be the source of a significant and costly problem.
Evaluating a Home’s Mechanical Systems
You must always inspect the basic mechanical systems, including the heating, cooling, plumbing, and electrical systems. Some properties may also have swimming pools, fireplaces, and septic systems. Make sure to inspect all of them thoroughly. When possible, have professionals inspects the property’s mechanical systems. While it may cost you a few hundred dollars today, it may save you thousands down the road.
Investor Loan Source, a private money lending company, provides high-quality investment property loans to private real estate investors at the lowest costs possible. Our process for providing real estate investors with private lending is unique. We place emphasis on the hard asset and value of the collateral (property) and less on the borrower. Our asset-based real estate investment loan model means we can provide more money lending to more investors than is available from standard bank loan models. At Investor Loan Source, providing real estate investors hard money loans is our business; it’s all we do. We offer several business real estate loans products designed to serve a variety of investors and property profiles, including private money lending for properties to sell on owner finance.
Your first real estate investment will be a learning process. While you may make a few mistakes along the way, educating yourself may help you avoid some common pitfalls. From misjudging resale or rent value to not doing proper due diligence, new real estate investors are at risk of losing serious cash if they’re not careful.
Mistake 1: Misjudging Resale or Rent Value
If you are unable to determine the potential value of an investment, it is difficult to make a confident purchase offer that meets your profit objectives. It’s an important job, but it’s not easy. Properly evaluating property is a skill every real estate investor must commit to learning. This important skill can contribute to a successful investment career.
On your first real estate deal, you may not yet be a value expert. Here are a few things you can do to help yourself:
Reduce the market to a relatively small, manageable area.
Study all the transactions in the market area.
Hire a professional for assistance.
Mistake 2: Underestimating Repair Costs
At some point, you may underestimate repair costs. It is important to avoid the enormous costs that could cause you to run out of cash or face other problems. To prevent large mistakes, learn a good repair estimating system and get help from other knowledgeable investors or contractors.
Mistake 3: Not Doing Proper Due Diligence
Some investors close deals quickly without completing proper due diligence. A proper due diligence process may allow you to withdraw from any purchase if you discover a problem.
Here are a few things to do during your due diligence process:
Obtain a good professional third-party property inspection
Analyze repair estimates
Evaluate zoning and local ordinances
Get a professional third-party opinion of the value
Investor Loan Source, a private money lending company, provides high-quality investment property loans to private real estate investors at the lowest costs possible. Our process for providing real estate investors with private lending is unique. We place emphasis on the hard asset and value of the collateral (property) and less on the borrower. Our asset-based real estate investment loan model means we can provide more money lending to more investors than is available from standard bank loan models. At Investor Loan Source, providing real estate investors hard money loans is our business; it’s all we do. We offer several business real estate loans products designed to serve a variety of investors and property profiles, including private money lending for properties to sell on owner finance.
