My friend Dave and I were out grabbing some appetizers and discussing how he wants to jump into an investment property. I could see the fire in his eyes—you know the “I’m going to make some money” look—and was talking up all of the property’s assets, including the neighborhood and the lack of competition there. Dave got so impassioned that he almost spilled one of our drinks. That’s how it gets when you’re talking about the value of residential investment properties that you’re confident will be a good deal, though.
Well, it just so happens that when Dave and I were paying, he accidentally added a zero on his tip. The waitress was extremely grateful when she collected the receipt and made sure to tell us to come back whenever we wanted. Dave’s expense popped up on his mobile banking app, and he quickly realized—he tipped $20, not $2. It’s just the same in real estate investing, I reminded him.
You have to be confident about how you value a residential investment property before jumping into it. It can be very easy to get excited about the potential for a property and forget to factor in everything that would contribute to repair costs or undermine your ability to sell at full market value. Often, unanticipated costs and a fluctuating market make it important to re-evaluate your numbers after completing a rehab.
What’s On The Tab? Determining Residential Investment Property Value
In order to have an idea of how numbers might change between the start and finish of rehabbing your residential investment property, you would need to know what these numbers are exactly right from the start. You’ll be looking at the variety of factors that might influence what you should offer for the property and the estimation for your repair costs.
When buying and renovating an investment property, it is important to take into account the repairs that a property may need when estimating its value. While some property conditions may be less costly than others, there are a number of factors that can rack up a large, influential bill during your rehab process. Just like ending a happy hour tab with a few extra drinks, you can easily be surprised by the additional costs of rehab from major projects such as bad septic systems or foundation issues.
It seems like a no-brainer, but you need to take property size into account when you’re estimating rehab costs and evaluating your property for the market. Any rehab will have its cost increase relative to the size of the property. And, often the numbers you get from the MLS or property tax record will be wrong. It’s best to whip out that tape measure and check for yourself.
What have other properties in the same neighborhood and that match your property’s size and layout sold for? A real estate agent can tell you what has already been sold and for how much to give you a strong idea of what to expect from your sale price. Furthermore, keeping comparable sales tracked will allow you to have a stronger idea of what your budget can allow for in terms of rehab, and how much your expenditures will affect your profit.
Consider your first investment numbers as if you were planning out getting those happy-hour drinks with a close friend. Maybe during the course of your conversation you realize, “Wow, I am starving,” and decide to order some appetizers. An extra drink or some appetizers are manageable, of course, but you can’t just ignore their numbers. Similarly, if your investment numbers are changing from your initial estimates, your pocketbook is going to be pinched when it comes time to sell.
Don’t Lose Sight Of Your Property Value
While overtipping might not completely kill your wallet at the end of the day, under or overvaluing your residential investment property could end up disastrous for you. At best, you are selling a property for less than it’s worth; at most, you are wasting precious time in a fluctuating market by letting your property sit without having an approachable price. There are always periods or reasons as to why you feel a need to undervalue a property, such as time constraints or needing cash back for a larger and more profitable investment, but the undeniable truth is that if you are undervaluing your property, then you are losing potential revenue.
Similarly, you might have a particular confidence in your rehabbed property. Perhaps you put in a beautiful aesthetic feature, or the location has something other comparables do not have. But overvaluing your property can be equally, or more, detrimental than undervaluing, as it may cause you to lose a sale entirely. At times, you can be your biggest adversary when it comes to selling a property at its accurate value because of risky emotional decisions.
Now, you can keep track of your cost estimates for rehab and property value in whichever way you find most convenient. But to reduce the mental load of this process, consider using what I and other HomeVestors® franchisees trust as the most user-friendly and accurate valuation and proprietary software solution, ValueChek™. It can itemize repairs, automate the regional effects on cost estimate, and ultimately help you evaluate the total cost and valuation of your property. Forget about missing zeroes, and start having enough time for that extra appetizer. Get in touch with HomeVestors and learn more about how one of the best valuation tools will make your investment money management more effective.
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