Rehabbing real estate, also known as “flipping,” is a lucrative real estate investing model, ideal for project-driven investors. But before you dive into the deep end real estate rehab, you need to have a strategy. Drafting a real estate rehab business plan will help you uncover potential obstacles and come up with solutions to meet those challenges.
To help you craft your plan of attack, here are 5 tips and tricks for creating a real estate rehab business plan.
1. Understand the Process of Real Estate Rehabs
The big-picture definition of rehabbing real estate is fairly straight-forward: buy a fixer-upper, renovate the property, and sell it for a profit. But there are a few details you need to understand before you create your real estate rehab business plan:
Rehabbing real estate works best in markets where home prices are increasing quickly. If homes are growing in value even without renovations, you have a head start on turning a profit.
If home prices are dropping, you’re swimming against the current. You need to get in and out as quickly as possible before the market drops further.
Your rehab is only as good as your workmanship. Before you do all the work yourself, consider investing in a contractor who’s willing to teach you along the way.
2. Get Clear on Your Goals
Why are you launching a real estate rehab business?
+ Perhaps your primary goal is to build a family business where you can spend quality time creating something beautiful with your loved ones. Maybe you’re passionate about revitalizing your neighborhood. Or maybe you’re simply looking for a flexible career that allows you to be your own boss.
+ Your goal for your new business will impact every business decision you make. So it pays to document your goals at the very beginning of your business planning.
3. Have a Solid Strategy for Finding the Best Deals
Most rehabbers follow the "70% Rule" when evaluating properties. This rule states that the purchase price should be 70% (or less) than the total of the After Repair Value (ARV), minus the cost of repairs. For example, if you estimate the ARV of a property to be $180,000 and the repairs to total $20,000, you want to get that property for $106,000 or less (70% of $180,000, minus $20,000 in repair costs).
If you’re not sure how much a real estate rehab will cost, get yourself a reliable Rehab Estimator. And if you need more help evaluating investment properties, use a smart Property Deal Analyzer.
4. Identify Your Funding Sources
Many flippers need a little help financing their first few real estate rehab projects. Consider your options:
+ An investment partner: Experienced real estate rehabbers make great investment partners because they have the funds to invest and they can mentor you in the business of rehabbing. They’ll expect a share of the profit as interest on their investment as well as a cut for providing guidance, but good partners are well worth this cost.
+ A hard money lender. Hard money loans are short-term loans, ideally suited to rehab projects. In addition to financing the property itself, they can also fund the necessary renovations. The interest rates are higher than traditional loans, but the quick financing and flexibility generally offset the increased rate.
5. Create a Marketing Plan
Your marketing plan could be as simple as hiring a real estate agent to handle the marketing and sale of your completed rehab. Or it could involve implementing your own multi-media marketing strategy. It depends entirely on your knowledge, tools, and local market.
If you’re new to the real estate rehab business, consider partnering with a real estate agent for the first few transactions. Agents are often willing to reduce their commission rates for repeat clients. And you may be able to convince a seasoned agent to teach you the real estate marketing ropes if you plan to handle marketing on your own in the future.
Being a real estate flipper is rewarding work. But you don’t want to go in blind. Invest a few hours in creating your real estate rehab business plan to outline how your business will operate and where it will take you. Your future self will thank you for it.