Reader Question: Are there any strategies or tips for renovating houses in run-down areas? A friend and myself want to purchase and renovate a property, but the budget is limiting the types of properties available to us. We have found plenty of houses within the budget that require renovating at a price we believe we can make a respectable profit. However, these houses tend to be in less desirable areas. Have you experienced renovating these types of properties? If so, any tips or advice would be immensely appreciated. Regards, James P.
Monty’s Answer: Hello James, I have renovated property on a number of occasions. I have also brokered many sales to investors and witnessed their renovations first hand. This allowed me to learn both what to do, and what not to do. I have answered your question, so here are the tips and my advice:
1. The best tip is to study the marketplace you are considering investing in. Before buying the first house, make yourself an expert in understanding the submarket. I mean the vital statistics: Sales rate, time on market, list to sell percentage, average price per square foot by style of home, percentage of listings that expire unsold, home value trends and more. In-and-out sale prices will be the best comparables if renovation improvements are included in the data.
2. How do you know you can make a respectable profit? Operate under the principle that one makes money when buying property, not when selling it. This real estate reality is not widely understood. Determine the cost to hold and renovate against the projected as-complete sale price to calculate the price one can afford to pay. Consider obstacles that may delay reconstruction time. As an example, permits and inspections can hold up completing work. This is important because loan interest, real estate tax and insurance cost add to the project expenses.
3. Now, about you and your friend, what is each of you contributing to the partnership? I have seen many similar “partnerships” fail. For example, if one person is doing the work, and the other is putting up the money, you need to consider a pre-established exit plan if the deal goes sour. Both parties want to avoid one partner being able to say, “ My partner was paid for his work and did well. Me, I lost money on the deal”. Ideally, each should be in the same position financially and have comparable worth assignments. Part of this equation depends on your life experiences to date. As an example, are both partners’ tradespeople? Spend time discussing what happens if things do not go well. Get it?
4. Be careful if your budget is forcing you to buy in a less desirable neighborhood. If it is a less desirable neighborhood, make certain it is a neighborhood that has already started a transition away from being a less desirable neighborhood. When you drive the neighborhood, do you see renovation projects under way, younger people on the sidewalks and a recovering business district? Look for completed renovations as a positive sign. If the home prices continue to deteriorate there, the partnership may not recover. Consider calculating a better return in a less desirable neighborhood. If renovating to sell versus holding to rent, there may be more cost in maintaining and managing the property.
5. Another “red flag” is your comment about a limited budget. Renovating an old house is not a project to jump into on a “limited budget”. Projects run out of money when they encounter an expensive problem they did not anticipate. This can be the time where the first person to abandon ship is your banker. It may be possible to avoid this problem by building a “emergency contingency” fund into the loan package.
The partnership may be better off waiting for a “real dog” in a better neighborhood. On the other hand, if you can pull this off successfully, I suspect there is a real niche for this in many areas. In some cases, you may be able to garner support and financial assistance from the municipality itself. I hope this advice is helpful. If there are more questions ask me.
Good luck to you both.
Monty
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