Flip Don’t Flop: What NOT to Do in Rehab Investing

The fix-and-flip, or rehab, market is one of the most popular places for the freshman real estate investor to start. It comes with the lowest barrier to entry. Shows like HGTV’s Flip or Flop and Fixer Upper make it all look so easy, boosting this popular real estate investment trend to hotter-than-ever degrees by showing everyday couples, with little-to-no money and experience, investing and rehabbing, while still coming away with a pretty tasty profit.

But for the newbie investor, getting facts from shows like these and not doing the very necessary homework beforehand, could leave you turning your big flip into the next big flop.

That’s why we’ve put together this list of the Top Six Things NOT to Do in Real Estate Rehab Investing:

What NOT to do (in real estate investing)

1. Don’t act without a strategy. One of the biggest mistakes new real estate investors make is not having an investment strategy in place. An investment strategy is a model outlining the types of projects you’ll be undertaking (rehab, rental, etc.), their scope and structure.

Oftentimes, an investor will fall in love with a particular property, make the acquisition, and then attempt to build a strategy that centers on that individual property—wrong. The strategy must come first, then you find the property that will work with the strategy—it’s not the other way around.

When it comes to designing your strategy, there is no perfect one-size-fits-all solution. You must choose a plan that fits your unique strengths and weaknesses and aligns with your particular investment goals.

2. Don’t use the wrong kind of financing. Not having enough money to put into the property is another common error investors make during their first acquisitions. That’s why financing is so important.

You want to make sure that the type of financing you pursue is well suited to you, and your project. Are you going with a conventional bank loan, hard money, or something newer and more alternative? Is the loan based on the purchase price or the value of the property after repair (ARV)? What is the interest rate? Is it a short-term or long-term loan? What are the credit and income requirements? These are all components that change depending on the type of financing you use, and they factor prominently into your ability to see the project through, as well as what you walk away with in the end.

3. Don’t settle for a lousy location. The mantra of real estate investing is, “location, location, location”—keep repeating it, it’s that important. For newcomers to the playing field, it’s better to pay a bit more for a property in a good location than to pay bargain basement prices for a similar property in a lousy one—a common mistake for rookies.

What makes a good location? Proximity to amenities such as grocery stores and other retail spaces, schools, parks, and libraries; accessibility to major highways and routes (think, easy commute); and the overall appearance, are all key factors. Whatever you do, don’t condemn your investment career from the beginning by making a hasty decision when it comes to location—there’ll be other opportunities.

4. Don’t lowball the cost of repairs. Before you dip your toe into house flipping, spend some time researching the average costs of repairs such as a new roof, replacement windows, heating and air conditioning maintenance, exterior paintjob or new siding, hot water heater repair or replacement, and mold removal—and that’s just a handful of possible problems.

Create a budget repair sheet and do a walkthrough with a general contractor prior to initiating work. This will help you to estimate the cost. Knowing which repairs are absolutely necessary and which can be cut can save you a lot of headaches and money. Be sure to seek out investors or contractors with more experience and knowledge than you have to ask for help—compensating them for their time and knowledge.

You can meet other real estate investors by networking locally, or online through sites like BiggerPockets.

5. Don’t pick crummy contractors. Of course the more sweat equity you can put into the property yourself, the higher your profit margin. But if the skills you bring to the table are limited, or like many of us, you can’t swing a hammer without nursing a swollen thumb afterwards, then contractors it is.

Good contractors are worth their weight in gold. They work hard and do the job right, complete their work on time, clean up when they’re done, charge prices that won’t leave your jaw hanging on the floor, and they’re licensed, bonded, and insured. If you don’t perform your due diligence to find dependable contractors upfront, the decision could cost you big-time when the final tallies are in.

6. Don’t skimp on time. Knowing how long a rehab project is going to take isn’t a skill you start with—it’s an art you develop over time as you build experience. That’s why, until you’re seasoned in the business, it’s a good idea to double your time estimate. Real estate investment is all about time: time to find a property, to close, to renovate, to fix whatever doesn’t pass inspection, to show the property, and finally, time to sell. That’s a lot of time for something to go wrong—and you’ll be very lucky if it’s just one thing. So when you plan your initial strategy, don’t underestimate the time it will take.

According to Warren Buffett, “Games are won by players who focus on the playing field—not by those whose eyes are glued to the scoreboard.”

Anyway you look at it, house flipping is a rewarding, but demanding, endeavor—not to be undertaken lightly. To come out on top you’ll need to focus like never before. Once you leave the starting gate with your first project, your full attention should be devoted to each task at hand until you cross the finish line. Only then will you be able to claim victory.

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Know Your Rental Expenses to Ensure Healthy Cash Flow

Being a landlord can be a lucrative proposition, but unforeseen expenditures can put a damper on profits if they aren't calculated into the rent beforehand. ​The reality is that the costs of a rental property extend far beyond the initial purchase price and fees, so having a firm grasp on expenses will ensure that you maintain a healthy cash flow. The marker by which you measure the success of your rental business will largely be based on cash flow, which is the income left after all expenses have been paid. So, what are the expenses you should factor in when determining how much to charge for rent?

Maintenance. ​​Even if you go to great lengths to rehab a property, it will still require maintenance in the future. ​It can be hard to foresee what repairs will be needed​​,​ but landlords should consider expenses like carpet cleaning, paint, electrical, plumbing and any other fixes that keep a property​ habitable for renters. ​The age, size and type of property will impact your costs, but as a general rule of thumb Fannie Mae recommends that a property owner should allocate two percent of the total property value annually to cover maintenance expenses.​ ​Landlords often underestimate the cost to upkeep a rental​ property​, and major capital expenses can stifle your cash flow​, so have a contingency plan.

Property Taxes. The amount of taxes paid on a property will vary by location,​ and there can can also be some variance depending on whether the rental property is also being used as your primary residence. Sometimes you will find that property taxes are included in your mortgage payment, but you should still breakout this cost when determining expenses. Taxes are variable, and in many cases they will increase ​annually​. ​A call into the county assessor will help you determine how much you should expect to pay in the coming year. ​

Insurance​. The cost for an insurance policy can fluctuate a lot depending on the location of the property. Rates can be further exacerbated if the rental is located in an area prone to natural disasters like earthquakes, flooding or fire, which can require additional levels of insurance. As a landlord, you should also consider liability insurance to protect your investment in the event a tenant pursues legal action. In the end, perform the proper due diligence before putting in an offer on a rental property, and contact an insurance agent to determine the specific costs and needs.

Utilities​.​ The property type and market will dictate exactly what utilities you should plan to cover as a landlord. In the case of single family homes, the tenant is usually responsible for all of the utilities. With multifamily properties gas and electric are typically paid for by the tenant while water and/or sewer will be covered by the landlord. Research what the competition is including in rents and what is being passed onto the tenant. To determine the potential costs, contact the utility companies and determine typical monthly usage and cost.

Homeowners ​Association Fees ​(HOA). If you are purchasing a single unit in a condominium or a single-family home, you may be responsible for HOA fees. These costs can range from several hundreds of dollars a month to nearly a thousand​. Depending on the amount of the HOA fees it could be a nonstarter, so make sure to understand what they are at present as well as whether they are expected to escalate or if there are any special assessments coming in the future.

​Vacancies​. In the aftermath of the Great Recession, the rental market has recovered and there has been sustained demand. That said, you should still anticipate periods when the property will be vacant. To determine how much money you should set aside, research your local market ​to understand how long rental properties stay ​un​​tenanted. As part of the is process, you should also set aside funds to advertise rental properties. While there are free tools like Craigslist that can be effective for marketing a property, other avenues like newspapers, real estate websites or property management companies will come at a cost.

Property Management.​ ​Hiring a property manager can free you from the tedium of being a landlord. If you own multiple rental properties, this role might be even more pertinent to your venture​.​ ​​To employ this service, it can cost between 8 to 10 percent of the gross rent​, but in return the property manager will handle ​tenant notices, inspections and evictions. In some instances, you may elect to only utilize a property manager for tenant placement. In that case, the model is often a flat fee that can cost as much as a full month of rent. Even if you choose to manage the property yourself, you should still account for the costs (e.g. gas, time, etc.)​ ​associated with it.

As a landlord, you can expect to encounter your share of surprises, but there is no need for expenses to be one of them. By mitigating the unknowns, you can be on your way to a profitable rental property.

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The Rise of Single-Family Rentals

People are trading homeownership for rental properties in large scores.

For the last decade the number of renter households has been on the rise. A Housing Vacancy Survey found that between 2005 and 2015, the market experienced its largest 10-year increase since 1965 with 9 million households entering the rental market, bringing the total number of renters to 42.6 million.

​The demand for rental properties is being driven by a number of factors. A sluggish market for new home construction has resulted in a dearth of affordable starter homes. ​Young people who are traditionally the most active homebuyers are delaying marriage, kids and mortgages​. ​And many Americans are still dealing with the fallout of the housing crisis and have been forced into the rental market while they repair their credit.

​But the boon to the rental market is also being marked by a shift in societal attitudes. Many people, especially aging Baby Boomers, no longer want to be saddled down by the responsibilities of owning a home and are finding an appreciation for the latitude offered by renting.

This trend towards renting shows no signs of slowing down. The Urban Institute reported that it expects the homeownership rate in the U.S. to continue to decline for at least the next 15 years, which will cause a sustained surge in the demand for rentals.

As consumer demand for rentals soars, it begs the question, how will the market manage to keep up?

Even as multifamily construction continues to skyrocket, apartment buildings are not able to shoulder the demand on their own. For one, the protracted timeline for completion on these properties is being outpaced by the growing rental population. And much of the new apartment construction has been luxury, which is not a fit for the many mid-market renters.

So, at an increasing rate, single-family homes are absorbing the large pool of people who are in the rental market. A new report released by ATTOM Data Solutions in October found that more than 18 million non-owner occupied single-family homes, or one in four single-family homes, is a rental property. This notion is further corroborated by research from Fannie Mae, which showed that 52.4 percent of renters ages 25 to 34 lived in single-family homes, compared with 43.4 percent in apartments.

That said, it is a good time to invest in single-family homes as rentals and those that do could be rewarded handsomely. As demand for rentals has ticked upwards, rents have increased 20 percent nationwide over the last five years. And while ATTOM Data Solutions’ report did note that the average annual gross rental yield for single-family homes dropped slightly from 8.8 percent to 8.7 percent year-over-year, they still offer attractive returns as compared to other investment opportunities. By most accounts, experts expect that single-family rental investors will be a driving force in the real estate market for many years to come.

In the years following the Great Recession the real estate market has been rescripted. Homeownership that had once been the cornerstone of the American dream has fallen into the background as many consumers opt to rent - whether out of necessity or preference. And while home buying is nary a thing of the past, many investors may find that renting single-family homes rather than selling them might offer the best returns.

For those investors eager to get in on the action, ATTOM Data Solutions identified the strongest markets for buying single-family rentals in the first seven months of 2016. It focused in on markets that demonstrated high gross annual rental yields as well as areas marked by low owner-occupancy rates, which can signal a strong demand for rental properties.

  1. Clayton County, Georgia in the Atlanta metro area - 24.3 percent annual gross rental yield
  2. Baltimore City, Maryland - 22.8 percent annual gross rental yield
  3. Wayne County, Michigan in the Detroit metro area - 18.5 percent annual gross rental yield
  4. Bibb County, Georgia in the Macon metro area - 17.7 percent annual gross rental yield
  5. Bay County, Michigan in the Bay City metro area - 17.6 percent annual gross rental yield

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How to Start Your House Flipping Business

Starting a house flipping business is exciting, but it can also be overwhelming. With so much to learn, and so many decisions to make, no one flips their first house without encountering at least a few hiccups along the way. Flipping is hot right now—due in part to reality TV shows that make it look easier than it is.

In fact, according to Fortune Magazine, some markets—such as Buffalo, New York—are at all-time high. For newbies thinking of getting into the game, this means the competition is stiff. You’ll need to bring you’re A game and use every advantage you have. By forming a well-rounded view of what home flipping entails before you get your feet wet, you may be able to avoid the usual pitfalls.

Begin by building your house flipping business on a solid foundation. The following pointers will tell you how.

House Flipping Basics for the Novice

Do your homework. Before you dive headlong into house flipping, it’s essential to spend some time researching it. House flipping is a multifaceted undertaking and you’ll never know it all, but to attempt to do it without some due diligence on the education front would be disastrous, not to mention just plain foolish. You don’t need to spend thousands on online courses, but you do need to do some reading. The Book on Flipping Houses by J Scott is a great place to start. Once you’ve thoroughly absorbed that one, try these other recommendations from Modest Money.

Of course reading books by the experts is only one way to learn. Do you have any friends or family that have experience with house flipping? If so, don’t let a resource go to waste—ask them about their experiences, their successes, and what they wished they’d done differently. Better yet, see if you can mentor under them.

Lastly, there are tons of free videos and podcasts online with useful information such as this podcast from BiggerPockets—just be sure not to get caught up in misleading reality TV shows.

Master the math. Don’t let the manual labor fool you—at the end of the day, house flipping all comes down to a numbers game. If you don’t roll up your sleeves and dig into the math on the front end, you could find yourself in a money pit further down the road. Luckily, you don’t have to be a rocket scientist to flip houses. The math is simple and straightforward—fifth grade level.

The first—and most important—equation to learn is “The 70% Rule.” This formula tells you the maximum price you can purchase a particular property for, and still be able to sell it for a profit—the Maximum Allowable Offer (MAO). To do this equation you have to know the after repair value (ARV) of the property. This amount, usually determined by your real estate agent, is an estimate of how much a particular property will sell for, once all the repairs and renovations have been completed. Once you’ve established the ARV, multiply it by 70%, and then subtract the anticipated cost for repairs. The answer is your target purchase price—don’t pay above this amount. Of course there are some exceptions to the 70% rule.

Know your market. Flipping a house is a lot of work and you’re going to be there nearly every day until it sells. That’s why it’s important that the house you purchase is fairly close to where you live—eliminating the extra wear of a long drive at the end of a hard day’s work. For this reason, it’s vitally important to know your local market, your town, city, or area. Check out what properties are selling for and how long it’s taking for them to sell. When considering a specific property, ask questions like: Is there a school nearby? How about amenities such as parks, grocery stores, and libraries? What are the demographics of the area? All of these things can help you determine your profit margin.

Assemble a solid team of contractors. It may take some time, but if you’re going to be in this business for the long haul and you’re not doing the hard labor yourself, you’ll need to build a team of contractors that are dependable and trustworthy. Of course this is easier said than done—quality work for a reasonable price is a rare commodity. By far the best way to find these individuals is to get a referral from other investors you know. Don’t rely solely on someone else’s word though, be sure to shop around for multiple bids—weighing price against reputation. The contractors you hire should be licensed, bonded, and insured. When negotiating the cost of a job, ask questions, be specific about what is included and not included in the work, and get it in writing.

Be patient. Rome wasn’t built in a day—neither is a house flipping business. Although time is of the essence when it comes to profit, don’t rush through your first house flipping venture, purchasing an overvalued property, allowing shoddy workmanship on the rehab, and selling to the first buyer who makes an offer, out of fear. Give yourself the time and space to make thoughtful decisions. And cut yourself some slack when something doesn’t go as planned. House flipping is all about the unexpected—but with flexibility and persistence the patient investor will find his, or her, way through the obstacles.

As with most things in life, although there isn’t one single path to beginning a successful house flipping business, what you put into it corresponds to what you get out of it. Or, as the financial analyst and advisor, Paul Clitheroe, said, "Invest in yourself. Your career is the engine of your wealth."

Dipping your toe into the house flipping business? AssetAvenue offers rehab loans from $150k to $2M. For more details, or to get an instant quote, click here.

10 Things You Should Know Before Investing in Rental Property

Many people dream of owning rental property—adding additional streams of income that catapult them to the next level of financial independence. But everything in life comes with its trade-offs—even dreams.

The reality of investing in rental property isn’t always as easy as popular television shows like HGTV’s Income Property, like to depict. As Benjamin Franklin once said, “An investment in knowledge pays the best interest." So before you make your first investment in rental property, it’s a good idea to spend some time on the front end researching what it’s really like.

The most important question you need to ask yourself is do you want to be a landlord?
The day-to-day management of owning a rental property is a big role. Being a landlord takes patience, flexibility, strong resolve when enforcing rules, and a long fuse. Disagreements between tenants, tenants that won’t pay, unexpected and costly repairs, long vacancies—these are some of the downsides of owning a rental property. Although it can be a dream come true for some—and if done right, it really can provide that additional avenue of income you’re looking for—it’s not for everyone.

Here are some things you should know to help you decide if it’s for you:

1. It’s not easy money. Investing in a rental property is often put in the easy money or get-rich-quick scheme category, but the truth is it’s no walk in the park. Although it technically qualifies as passive income, that doesn’t mean you’re not going to work hard. In fact, if you decide to manage the property yourself, it’s akin to taking on a second job. If you’re looking for something more hands-off, stick with stocks or mutual funds.

2. There are no guarantees. Not only is owning/managing a rental property not easy money, there’s no guarantee that you’ll even make money—it’s risky. With a fluctuating, and often unpredictable, market, as well as lots of hidden costs lurking around every corner, you really need to ask yourself is it worth the risk? As you’re considering each potential property, never forget that the reason you’re investing in rental property to begin with is to gain income. Weigh everything carefully and always ask yourself, “Will this property actually generate money or is there a chance it might be a money pit?”

3. You need more money to get started than just the cost of the property. When investing in a rental property, the initial purchase is just the beginning. Be sure to set aside funds for other start-up costs such as renovations, repairs, and a higher property tax bill that could be double what you were previously paying. You should already have a solid income before you get started.

4. Location matters. Just any old apartment building or rental house isn’t going to fit the bill. Before you get your heart too set on a particular place, take the property’s location into serious consideration. Ask questions like is the crime rate high in the area? Are there schools close by and how are they rated? How far from basic amenities such as parks, grocery stores, and restaurants is it? Are there a lot of other rental properties in the area and, if so, what do they typically rent for?

5. Have the property inspected by a professional before you buy. A professional inspector can put your mind at ease about a purchase you’re considering, or send you running for the door—either way you’ll be thankful. For about $250 an inspector can tell you if the property has termites, crawl underneath it to examine the foundation, and see if the roof will need replacing before the next winter, and much more.

6. Expect the unexpected. Owning and managing a rental property is kind of like being the captain of a ship—you’re constantly working to maintain it and keep it heading in the right direction, and then, just when you think everything is under control, a giant storm comes out of nowhere and ruins your best laid plans. Unexpected (and often costly) issues can and will arise with rentals—everything from clogged toilets, flooded basements, and burst water heaters, to disgruntled tenants refusing to pay before skipping town.

7. Renters can do a lot of damage. We all know the famous hell hath no fury like a woman scorned, but what landlords come to find out is that disgruntled tenants are next on that list. Until you’ve been victimized in this way, it’s hard to imagine the amount of havoc an unhappy renter can wreak upon a property. Damage can include graffiti on the walls, concrete in the toilets and sinks, ripped or stained rugs, broken windows, nails or hammer marks in the floors, missing doors, and any other damaging mischief your angry tenant can dream up.

8. A good renter is worth holding out for. Having one bad renter will make you appreciate the good ones. In the long run, it’s worth a little extra time and a more rigorous screening process to find these diamonds in the rough. Good renters pay on time, take pride in their home and yard by keeping everything clean and in good working order, treating the property like their own, and being respectful of neighbors. These types of tenants generally stay longer, too.

9. There are pros and cons to hiring an outside manager. Okay, so you’ve figured it out. You’ll just hire someone else to manage the day-to-day minutiae of the property. While this can save you a lot of the hands-on work and the headaches that go with it, you’ll also be losing about 10 percent of the rents to pay for this service—nothing to scoff at. Furthermore, you’d be putting yourself in a situation where you have less knowledge of what’s actually going on with the property—a decision that could come back to haunt you further down the road. If you do intend to hire someone, you should at least plan on being there in the beginning, to make sure the tenants are good ones and that the building is in top-notch shape.

10. It’s better to be hard and fast with the rules. Being a landlord is not for the faint-hearted. Although you may feel good about providing a place for people to live, if your renters don’t pay on time, or they’re causing trouble, you can’t be wishy-washy about enforcing the rules, or show any sign of weakness. It’s much better to assert yourself right away—otherwise you may find your tenants taking advantage of you.

With a little forethought and some careful planning you can make your rental property investment the success of your dreams.

How can AssetAvenue help?

AssetAvenue is dedicated to providing flexible financial solutions for residential real estate investors. We offer rental property purchase and refinance loans that range from $125k to $1M. Our online lending platform was designed with the borrower in mind: lending is simple, quick, and reliable. We offer rental property financing at low rates and have nationwide coverage on all asset types. Click Here to get an instant online quote.