Five mistakes to avoid when trying to get a
real estate fix-up project done and actually make money
As an experienced real estate professional and investor, I am often asked questions by people who are looking to get into real estate investing. After speaking with several who are just beginning or are in the middle of something and are running into hiccups, I have realized a pattern of similar mistakes. I wanted to share with you the top five avoidable errors and suggestions on how to work around them in order to complete your project on time and within budget.
1. Lack of Planning. I know this seems like a no-brainer, but it is always surprising to me how many people I speak with that are in the middle of a project, and have no idea when it will be completed. The first thing you should do before you pick up a hammer, is to set a date. When would you like the property to be on the market?. Then start contacting your subcontractors for bids, lead times, and the estimated time needed for them to complete their portion. Once you have that information, then it is time to update the project calendar to make sure it is realistic. Recently I ran into a friend of mine who had bought a property over a year ago. The project was far from being completed and he had no clue when it was going to be done. Time is money, and it is extremely difficult to make a profit on a property that has taken over a year to complete.
2. Lack of Supervision. If you are under the impression that you can keep your day job and only work weekends on the project, expecting that the general contractor completes your project for you on time and within budget, I would advise not getting into real estate investing. While most contractors have the best intentions, they typically have multiple jobs going at once to sustain themselves. Especially when they know that you will not be around during regular business hours to check on them. What this means, is that you need to be constantly meeting with them at the project to hold them accountable to the timelines you both agreed to. Otherwise, they may ignore your project to complete another one because they are making more money, or prioritize another customer who is complaining about their work, etc. Many years ago I was working with a general contractor who I suspected was lying to me as he knew I had a day job and could seldom show up during the work day to check on the project. It was becoming apparent to me that there wasn't any progress being made even though he continued to claim that he and his guys were there everyday. One evening I decided to set up a little test and put a piece of tile against the back of the door they would have to enter the next morning. Three days later I showed up at 8:00 am to find the tile in the same place I had left it. I called the contractor and he told me they were at the property working away to which I replied that I was actually standing in the property and it was vacant.....and had been for three days. He was speechless and of course at this point I had no choice but to let him go.
3. Over-improving. This is a very hard concept for most first time investors. Remember, you are not moving into this property and now is most certainly not the time to build your dream home. Finish the property based on what the immediate market is demanding. You will seldom get your money back if you invest in items that buyers don't percieve much value. For example, an investor I spoke with went ahead and invested in a nice set of stainless steel appliances and later realized after his property was listed that all the other properties in the competing range did not have stainless steel appliances. The buyers in that area would have been quite content with just white appliances and he would have saved himself several hundred dollars.
4. Not knowing your numbers. Before you acquire a property you should have already done research on what improved homes are selling for in the immediate area and complete an estimation of what it will cost to get the property ready for the market. If you haven't done this....DON'T BUY THE PROPERTY!!! During the construction phase of the project, you should be updating your numbers weekly so that you are tracking against your cost projections and the impacts to the bottom line. If you have ever heard someone say that they went $30K over budget, neglecting this, is where it all started.
5. Lying to yourself. It is easy to do. The most common ones I hear are people setting unrealistic time frames for construction, underestimating how much the project will cost to complete, and thinking that they can make up exceeding budget by increasing the amount they list the property for even though the market doesn't support the higher price. Remember numbers don't lie and proper planning is crucial.
If you have any comments on your own experiences or feedback on this article, I would love to hear them.
Stay innovative and email me at Travis@tjainvest.com.