When it comes to real estate investing, the goal is to turn a profit in as little time as possible. People who take on a fix-and-flip project often take great pride in creating a beautiful masterpiece home that creates a bidding war frenzy. New investors often wonder, “What are the warning signs of over improvement on a fix/flip?” Ideally, figure out how to strike the right balance before you start your flip project. Knowing how much to invest in repairs and renovation helps you when securing quick financing for a non-owner occupied real estate property. When figuring out how far to go, start with the neighborhood and price level of home. You don’t need to spend as much on flooring, appliances, drapes, appliances and lighting in an entry-level “starter home” compared to a step-up or luxury home in a nice, upscale neighborhood.
It costs too much to change your improvements
One sign you went too far with improvements is if it would cost a lot for the new owner to “unimproved” all of your improvements. According to an article by biggerpockets.com, a person buying a $100,000 suburban cookie-cutter home does not necessarily want crown molding, antique vanities and expensive travertine showers. If a potential buyer who comes into your investment property doesn't like your choice of cabinetry, countertops or flooring, he or she will likely consider what it costs to replace what you've done. Avoid permanent bookshelves and quirky upgrades with limited appeal. As far as windows and doors, focus on clean and attractive as opposed to a design statement. For much less money, you can make a design statement with staging.
Upgrades don’t necessarily impress the appraiser
Another sign your renovation plan is too lavish is when the upgrades will not affect the appraised value. Find out ahead of time whether an appraiser thinks certain improvements add or detract from the home’s value. Adding square footage is typically the best way to add value. Experts caution against turning two smaller bedrooms into one larger bedroom or multi-purpose room since it’s better to have more rooms rather than fewer rooms. Also, most appraisers do not give you a higher home value simply because you chose high-end appliances or exotic wood for the flooring.
A listing price higher than new construction
If you need to list your fix-and-flip for more than a new construction home of comparable size, it’s a sign you spent too much on the improvements. Most new homes sell at a premium. It’s smart to tour new home models to get an idea of what people want in terms of improvements and finishes. But it’s wise to choose less expensive materials that look nearly as nice. For example, an investor could buy your fix-and-flip to turn it into a rental property. Inexpensive laminate flooring would likely appeal to the investor or a typical home buyer in the low to mid-price range. Visit homes for sale in the neighborhood so you get an idea of how the competition fixed up their homes.
Finding the right balance and working quickly lets you make a profit on your real estate project. After renovating your fix-and-flip, focus on presentation by arranging the furniture, adding decor items and accessories that accentuate the positives of the home. At Center Street Lending, we provide financing to real estate investors when more traditional lenders turn you away. We are a private money-lender requiring minimal documentation and offering quick financing on non-owner occupied real estate properties. For more information on our asset-based funding with a 24-hour turnaround and the warning signs of over improvement on a fix/flip, please contact us.
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