The models that give you the most choices are the ones that require rehabilitation, renovation, or refurbishment. Using them properly will give you three options right away: 1) You can fix and sell (flip) now; 2) You can fix, hold and rent out with the rent covering the underlying payment; and 3) You can fix, hold, rent out and sell sometime in the future. The more properties you have with all three of these choices, the more diversified your portfolio will be, as detailed in my book “Flipped Out?” Over the past 15 years, I have grown to appreciate having all of these options available. Let’s look at these choices in more detail:
Model #1: Fix and Flip Right Now
If you take this approach, you must understand and accept the risks — the biggest one being that the market may take a dip and you may be left with a house that you can’t sell that is worth less than what you’ve invested in it. It can even get worse than that when the market falls off the cliff – far and fast, as we have just experienced. The cost of holding on can have just as huge an impact on your finances as the cost of letting go. The fix and flip model can work and has worked well for me at times in the past. It works the best when you have more than just the immediate sale as an option as to what to do with the house after purchase. I always go into a purchase knowing about these additional options. I buy the house, fix it up and put it on the market for a limited time. If that time expires without a sale, it goes into the rental pool where hopefully, it immediately gets into a revenue generating capacity. This is how it works. I know going into the project that the numbers will work either way. I have not overextended myself purchasing the house without being able to take out long term financing; and I’m not stuck paying for a house that I have for sale in a down market for months on end.
Model #2: Fix, Hold and Rent Out With the Rent Covering the Underlying Payments
Will the rent cover the underlying payments (mortgage, property management, maintenance, insurance, taxes and repairs) when a resident occupies it? This is a must for me. I have to look at long term financing options at the time and make sure it will work. I also have to look at how much a property will cost in payments and operating expenses over time. Different people have a different impact on elements of the house. Resident turnover happens; weather impacts happen; tax laws change; recessions occur; accidents happen; and parts of the house wear out non-uniformly. All of these things need to be considered as possibly happening throughout the holding period; and of course, the longer the holding period, the greater will be the likelihood that any or all of these things may happen.
Model #3: Fix, Hold, Rent Out and Sell Sometime in the Future
Now I realize that no one knows what will happen in the future to the market or the world for that matter, but I need to be comfortable about the home’s future value in order to fix, hold, rent out and sell sometime in the indefinite future. The home needs to be in a settled area (preferably filled with working, stable families, not declining, and not scary — filled with drug addicts or gangs); the home needs to fit in (not be overbuilt, nor the ugliest home in the neighborhood) with the rest of the neighborhood when it has been fixed up; and it needs to look like a house someone will be proud to call home (in a good location, modernized (not obsolete), attractive, clean, having features people will find attractive and functional). Sometimes it takes a while for all of these features to materialize. For example, sometimes neighborhoods improve and sometimes they decline over time.
Mike Sanderson is the author of the new book “Flipped Out? – Want to Achieve Sustainable Real Estate Success?” Available now at http://SandersonInc.com He is the CEO of a family business that owns, manages and maintains over 100 revenue producing rental units–a majority being single-family residences that were purchased in disrepair. Mike has actively participated at all levels of the purchase, construction and remodeling of over 100 homes and 20+ multiple unit buildings. He has numerous years in the construction of roads, new homes and remodeling that give him the distinct advantage of having a vast amount experience.
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