Why am I teaching a class next Saturday about Rehabbing and Renting Kansas City investment property versus flipping homes? Two main reasons;
- Finding a home that has the numbers to flip aren't nearly as numerous (or in as good of neighborhoods) as finding homes to Rehab & Rent.
- Flipping real estate is simply an income replacement...or supplement. Rehabbing and Renting is a method of generating a little extra cash flow while building equity for your future. Really just a more hands on way of becoming a "passive" real estate investor.
The Numbers Of Rehabbing & Renting
Right off the bat when you are looking for a home to Rehab & Rent vs Flip you can find a house that sells for 6% - 8% more and still make money! Now, that may not sound like a lot but have you tried to buy houses at the prices needed to flip? It's inside that last 10% where people make and lose money. And it's also inside that last 10% where sellers seldom go.
The 6% - 8% savings comes from you not having to sell the property when you are done rehabbing. You save the real estate agent's costs and the closing costs. And before you tell me "I can sell it myself" you had better pay attention to what market we are in.
And think about this, rehabbing to a rental standard is much different than rehabbing to a resale standard. If I know I'm going to rent this investment property I'm far more likely to downgrade the carpet a little, downgrade the paint a little, downgrade several things...a little. I don't want to go cheap. I do want it inhabitable, desirable and functional. I just don't need it to "Wow!" a prospective buyer. Therefore, cost savings here that I can spend later when it's time to sell...when I have even more equity in the house.
Negotiating The Purchase Of An Investment Property
It doesn't take a genius to know that most people don't wish to give their homes away. You can negotiate them down based on cost of improvements necessary, equity they may have in the home and a whole host of other factors.
But too many "flippers" bought homes that were priced too high. Flippers get frustrated working with me because I won't let them buy homes they are going to lose money on.
"But if I can make $8,000-$10,000 on this I'll be fine."
Ah, have you ever flipped a house? How about more than one? You can go through your "profit" of $8,000-$10,000 in extra, unexpected repairs and price reductions in a heart beat.
In flipping you need to buy a house as follows: ARV - Quick Sales Discount (5%-10%) - Cost of Repair - Holding Cost - Sales Costs - Expected profit (15% - 20%) = Purchase Cost.
When you are rehabbing a house and then holding it as an investment property for rental purposes you can add back into your purchase price the Quick Sales Discount (or at least some of it) and the Sales Costs. This will immediately include a whole lot of homes you didn't necessarily have access to before.
So how would you like to own a home for rental purposes that you purchased and rehabbed and still saved 15% - 20% below the actual value of the home? You'd have all that as equity for your future. Buying an income property can be done so many different ways. This is but one. If you ‘d like to learn more about Rehab & Rent just see the all the details of an upcoming workshop I've got going on.
Originally posted on Kansas City Real Estate Investing.