If you want to make a business buying and renovating houses you should probably start with something easy. There are a lot of reasons why the Tudor street property I have been writing about recently would not be a good first project.
IT’S LIKE TRADING
Think of it this way, when you’re trading or investing, you should shoot for the highest reasonable return available, with the lowest downside risk. Obviously, this is a subjective criterion. But let’s break it down into a few parts.
When you go to sell a property, you want to appeal to the largest demand base possible. This means, whether you are renovating a 100k rental or a $1,000,000 mansion (or as we like to call them here in California—a starter home,) you should know your market. Which one has more people looking to buy? Well, we all want the million dollar place, but not as many people can afford it. So, when you shoot big, be prepared to sit on the market a little while. Obviously, you want to fix the place up just a little better than the other retail competition. But you also don’t want to customize too much. The market doesn’t care if you like bright pink walls and blue carpet. I’ve done so many houses, I’m not even sure what my personal taste is when it comes to decorating— but I know what sells.
You need to consider things like affordability and what people are looking for in different price ranges. For example, three of my best houses last year were 2/1 without a garage. These all sold in the 220-250 range fixed up (yea, California prices). A lot of professionals say you should stay away from anything less than a 3/2/2 (three bedrooms, two baths, and two car garage). And, in a lot of parts of the country, they’re probably right. But locally, people still want houses that are nice and reasonably priced.
LOOK AT THE MARKET
The real trick is to fit into the market. Find a junky house without any unfixable functional obsolescence. That’s the fancy term real estate people use to say, stuff you can’t really fix without a lot of trouble. Examples are a nicer house without a master bathroom (I learned this the hard way); a bedroom that you have to walk through to get to another bedroom; a one car garage in a nicer neighborhood; etc. There are exceptions to these guidelines, but when it comes to renovate and sell; your bottom line doesn’t rest in just this one deal. Margin on one house is great, but turnover and speed are where it’s really at when it comes time to make money. And to achieve that, your first few projects should be in neighborhoods with high demand, moderate supply and have a few nice houses to justify your unreasonable asking price, and a few junky houses so you can get a good deal.
