This Issue: How to Buy and Rehab Property for BIG Paydays

Make Good Money in Residential Real Estate by Fixing up Houses

One of the most satisfying and popular ways to make money in real estate is buying a property at a discount, fixing it up, and selling it on the retail market. This is called "rehabbing" or "retailing." This lucrative type of investing can be very rewarding, allowing you to see the results of your work immediately.

Many successful rehabbers focus on fixing up bread-and-butter "family" properties, making $15,000 to $20,000 on each. Doing two or three houses like this a year can provide you a great supplementary income, while doing six or more a year can provide you with a good living and freedom from a job.

Cosmetic vs. Structural
When looking for an investment property to rehab, keep your eyes open for fixes that will make a big difference, but not necessarily cost a lot. Look for houses that need cosmetic changes such as new:

• Paint
• Carpet
• Fixtures
• Landscaping

Until you become an expert at rehabbing, avoid properties with structural problems such as foundation problems or rotten wood. These can sometimes be extremely profitable, but they can also sometimes turn into "money pits." It's best to avoid structural problems as a rookie rehabber and stick to buying houses that need little more than "curb appeal."

Buying it Right
It's often said that real estate investors make their money when they buy, not when they sell. This simply means that when you get in for the right price, you are guaranteed to profit when you get out.

So what is a good deal? You want to have at least a 25% margin--after expenses--to ensure that you make enough money. For example, if a house in perfect condition will be worth $100,000 fixed up, you must get it for $75,000 or less. But we're dealing with fixer uppers here, which means the houses you buy will NEVER be in perfect condition.

So let's assume that $100,000 house needs $20,000 worth of work. Well, now you must get it for $55,000 or less. This gives you plenty of room for repair costs, holding costs, unseen expenses, and profit.

Limiting Your Risk To make every deal as profitable as possible, you must limit your risk. The biggest risks in rehabbing property are:

• Repairs cost more than you thought they would.
• Property doesn't sell as quickly as you had planned.
• Property doesn't sell for as much as you want it to.
• You don't have the proper insurance coverage.

Pros and Cons of Rehabbing
While you can make a great deal of money in rehabbing, it can be frustrating and time-consuming if you don't do it right. Beware of the risks listed above.

On the other hand, you don't have to deal with tenants, you can see the progress being made every day, and you're updating housing and improving a neighborhood. It's rewarding to drive by houses you've bought, rehabbed, and sold.

If rehabbing houses interests you, try doing one or two while maintaining your current job. If you enjoy it, and it makes you enough money, perhaps you might try going full time as an investor. Fixing up houses for new buyers is one of the most satisfying things you can do in real estate--and the most profitable.

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Five Tips to Lower Your Risk

Here are five ways you can lower your risk when rehabbing real estate:

1. Make sure your contractors are licensed, bonded, and insured Whenever you find people to work on your properties, also make sure they are subcontractors, not your employees. The best protection is to have workers sign subcontractor agreements. Below is a valuable checklist.
   
   Make sure the contractors you hire:
   
   • Carry their own workers' compensation insurance.
   • Set their own hours, and don't clock in.
   • Work for others in addition to you.
   • Have their own transportation and tools.
   The most important thing is to make sure everyone who works on your property has workers' compensation insurance. What would happen if someone working on your property fell off the roof and got injured? Well unfortunately, many state courts would hold you liable for those injuries--so ask for proof of workers' compensation insurance. If they don't have it, deduct the premium out of their pay and buy it for them. This is the only way to avoid costly liability in the event that an uninsured worker gets hurt on your property.


2. Determine repairs at the outset
   First off, make sure you are only dealing with contractors that you've checked out. Call their references, and don't necessarily go with the least expensive one.
   
   Once you've settled on a contractor, get a written bid. Have every repair put in writing, listing all materials to be used. List the type of tile to be installed, each plumbing fixture, every can of paint, etc. Lastly, make sure the contractors understand that you'll hold them to the written bid.


3. Have time limits and per day penalties
   Some investors sign a repair contract and give the contractor six months to finish the job. Four months later, they discover nothing's been done! Never let more than a week go by without knowing where the job is.
   
   One way to do this is to break the job into a timeline. Have completion dates written into the contract so you and the contractors know what needs to happen and when. For instance: If a house needs the yard cleaned, a tear-out, drywall, a paint job, and a new roof, schedule it out. For example, in the first seven days, the yard will be cleaned, the tear-out will be done, and the drywall will be started. By the end of the second week, the paint will be finished. By the end of the third week, the roof will be completed.
   
   Make sure both you and the contractor understand and agree on this ahead of time. Then, if the contractor gets behind, withhold payment until the work is completed as agreed upon in the contract.


4. Only deal with pre-approved buyers
   You should never sign a contract with a buyer until they've been pre-approved for a loan. In today's market, lending requirements are very strict. So if your buyer tells you he/she is pre-approved, contact their lender or mortgage broker to confirm it.
   
   If a buyer intends to purchase with all cash, that's great! Just make sure you verify that they have the money. Ask for a recent bank statement that shows they have the cash. This is called "verification of funds."


5. Get the right insurance
   Tell your insurance professional exactly what you're doing. Make sure you have the right amount and proper type of insurance to cover your investing activities. Put all recommendations in writing and keep them as future protection in case you find that you don't have enough insurance.
   
   Vacant property is often difficult and expensive to insure, so shop around and make sure you're insured for its full replacement value.

If you follow these simple steps, real estate investing through rehabbing can be incredibly profitable and rewarding.