There are many ways to make handsome profits in real estate. You can be a “wholesaler” – someone who quickly snatches up houses and flips them to other investors – or a retailer, someone who fixes them up to resell at the retail level. In almost every case, the bulk of the profit goes to the investor who fixes and up and sells properties to owner-occupants. Investors at other levels get their cut, but the retailer receives the biggest reward. And for good reason – for it is he who puts in the most work and takes on the greatest amount of risk.
But what if you're an aspiring real estate investor who isn't really sure which end of a hammer to use? Do you have to be Bob Villa in order to undertake rehab projects? The good news is that even the least handy of men (and women) can make it in the rehab biz. Construction knowledge is a plus, but you don't need to be an architect or wear a hard hat to make the big bucks in real estate rehabs.
Know Your Strengths
So you were almost held back in junior high because you failed shop class… And your daughter had to put together her own doll house on Christmas morning… And you nearly killed the cat the one time you tried to use a nail gun – the important thing is that you recognize your limitations and know your strengths! Don't waste your time on manual labor if it's not your thing. Instead, hire a contractor or consider finding a partner to do the dirty work. After all, the less time you spend on repairs (and having your “repairs” repaired), the more time you will have to find and negotiate new deals!
Many real estate investors have become millionaires without much construction knowledge – but even more have lost fortunes due to ignorance and lack of experience. For this reason, it is a good idea to learn at least a little about home improvement. Touring the aisles of your local Home Depot or Lowe's is a good place to start. Learn the prices of items that commonly need to be replaced – dishwashers, toilets, ceiling fans, molding, paint, etc. The big box home improvement stores also offer classes on activities such as tiling kitchen floors and replacing windows. By developing at least a basic knowledge of home improvement procedures and their costs, you will be better prepared to find a partner or contractor – and make sure that they aren't ripping you off!
Playing the Partnership Game
There are plenty of people out there with a solid understanding of construction, a good deal of home improvement knowledge, and the willingness to get their hands dirty by putting in a long day of honest work. Many of these same people, for one reason or another, need you as much as you need them. Perhaps they think that their credit is too shoddy to get into the rehab game on their own. Maybe they mistakenly think that real estate investing requires more start-up capital than it actually does. Or maybe they're just uncomfortable dealing with the paperwork, mortgage lenders, real estate agents, and prospective buyers. In any case, if you're able to take care of the “white collar” aspects of rehabbing, you can usually find a partner with the requisite “blue collar” knowledge and skills.
If you take on a contractor or handyman as a partner, make sure they have experience at doing fix-and-flips. It's one thing to know HOW to fix things, it's another to know what to fix. An experienced contractor who is not an experienced investor may end up putting too much money or work into things that aren't profitable, thus eating up your half of the pie. It's worth giving up more than 50% of the profit to gain the experience in knowing what (and what not) to fix.
If you do decide to take a partner, be sure to establish a legal partnership and to put everything in writing.
Taking on a partner may be a good idea for novice investors who lack even rudimentary home improvement knowledge and have virtually no experience in repairs. But a partner is going to demand a much greater reward than an independent contractor, and therefore, you may decide that hiring out your labor is preferable to going into business with a handy man once you gain experience in the business.
For small jobs, you can usually find someone in the “services provided” section of your local classifieds. Unskilled labor can usually be procured for $15 per hour or less, and skilled contractors are typically paid about double that. For larger jobs, you should get bids from three contractors. Spend time with all three of them and ask a lot of questions. If there are discrepancies between the contractors' assessments, explain the differing perspectives to each of them – each contractor's response will help you determine if they are incompetent or dishonest.
Finally, as an individual real estate investor, you should go with smaller companies if at all possible. Doing so will earn you discounts and develop loyalty. With each rehab that you witness, the more knowledge you will attain. In no time, you might even develop the confidence to pick up a hammer and use it yourself! – but proceed with caution. Remember, when it comes to real estate investing, it's best to stick to your strengths!