A common mistake among novice investors is to believe there may be appreciation during rehab which will add to profits. The reality is that in a rehab and resell the profits are made at only 1 time, when the property is purchased. You make your money on the buying side. Relying on appreciation or even the possibility especially in short term is speculating, not investing.
Lending is very difficult to obtain for an R&R investor. Therefore if you don’t have cash you will typically turn to a hard money lender for leverage. You have to be careful to not get in over your head by using leverage. Extra cash involved you need to be aware of are:
- closing costs for buying AND selling
- repairs
- holding costs loan payments, interest, taxes, maintenance, advertising, and possibly staging
The best buys typically are homes that will not pass conventional financing most often vacant foreclosed properties. They are tagged by the banks as cash or rehab only meaning no traditional buyer need bother making an offer. This significantly lowers the potential buyers putting further pressure on the sales price to your advantage. A good threshold to stay within for offer price would be 65% of ARV (After Repair Value) or AIV (After Improved Value). Using this calculation leaves room for the following additional considerations:
- closing costs 5%
- holding costs for 6 months @ 15%
- utilities and (association ect) for 6 months
- future real estate commissions and closing costs on the resale
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