3 things to consider when evaluating a potential rehab project

Ginger Dean

December 23, 2013

By: Ginger Dean, Home Finance Specialist

In: Finance and Legal

If you're seeing a lot of investors buying and fixing up a properties and then turning around and selling them for a hefty sum, it may seem like a surefire way to make money in the real estate market. Many investors do it and are skipping happily to the bank. But the investors making a killing off of this strategy completely understand the market. They take their time to evaluate every factor before moving forward with a purchase. Most newbies typically get burned because they don't do their due diligence properly. As a beginner real estate investor, you need to know what works and what to look for during your property evaluation.

Property location

It's not just enough to find one or more properties anywhere and decide to buy and fix. The housing market is just getting warmed up, so you need to choose your locations and neighborhoods wisely. For example, it doesn't make sense to purchase a 2 bed/1 bath condo - even if it's at a giveaway price - if there is no demand for that kind of property in that area.

If you're looking at properties in areas where the market is bad, the city's economy is struggling, there are fewer jobs, and/or the crime rate is high, you're probably not going to get the big payday you want. Look out for cities that are growing or thriving, and check the proximity to transport hubs, hospitals, good schools and businesses, and safety and crime rates.

Compare financials and costs

Bottom line - is the property worth it? This might seem like a basic question, but it's extremely important. You need to consider how much you'll have to spend to fix the property, how much the property is worth before the reno and what it will be worth afterwards, how much you're willing to pay in taxes, etc. Make a mistake here and your fixer-upper can quickly become a hard financial lesson learned. Also, find out how much it'll cost to maintain the property, possible tax requirements, and holding costs (in case you prefer flipping to leasing) until you eventually sell.

Impact on your bottom line

The most important question may be if you want to invest in the property with the intention of building wealth via buy and hold units or if you want to make a quick profit with flips. It always helps to know what you want before seeing the property, and it will help you decide if you even want the property in the first place.

Rehab projects can be tricky - many factors must be taken into consideration before moving forward. Consider your cash on hand, location, potential issues and how you'll address them, and your entrance and exit strategy. While no project is perfect, taking all factors into consideration will reduce the likelihood of losing money.

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