When Should I Rehab A Property And Sell It For Profit?

So you’ve found a great real estate deal and a motivated seller ready to hand you the keys at closing. At this point, you may debate whether to wholesale the deal to another investor buyer for quick cash or to rehab the property yourself, which will obviously take longer but should yield a larger profit. To help you make up your mind, I'll help to point out the key differences between the two and the pros and cons of each decision.

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Wholesale

There are only a few times when wholesaling is definitely the way to go: When you need quick cash, when you're tired of doing rehabs, and when you don't have the funds for acquisition, repairs, and holding costs. Frankly, sometimes we like to over-complicate things that really are simple.

  • Do you need money? If so, and you want to get your money now and don't want to wait, then wholesale it is! As long as you know the ropes of wholesaling this is a no brainer way to get money quick.
  • Check and double-check your pockets. Do you have the funds for acquisition, repairs, permitting, closing and holding costs? This is very important. Flipping a house only makes you money if you can afford the process. Otherwise, you're putting too much skin in the game only to get little return on your money and your time. If this is your situation, wholesaling is the way to go.
  • Tired of rehabbing? Busy with other projects or just burnt out? Rest assured, I've been there. And this is perfectly alright! This is when knowing your investment strategy comes into play. Don't forget: this strategy can and will change. You can be focused on flipping for a few years and burn out. Don't push it if you're not into it at the time. Take a break and wholesale when you don’t want to rehab. Don't simply play the game just to play it. Am I making sense here?
  • Market conditions not conducive to rehabbing. In a hot real estate market, there are times where the majority of appreciation of home values is artificial. Doing rehabs in such an environment is a dangerous game to play. Instead, find deals at deep discounts and sell to seasoned investors who can navigate the ins-and-outs of a crowded market and sell the property for a profit.
  • If you're new to the real estate game. This is an awesome place to start for a budding real estate investor. Wholesaling allows you to learn the terms, the market, build relationships, and most importantly, pad your bank account and get ready for your next deal. Whenever I go into a new market, I always wholesale first. I get to know the players, the neighborhood, and make money while building my confidence in a new city. Trust me, it works.

Overall, wholesaling is the way to go if you're shaking your head "yes" to one or more of these above reasons to wholesale. Even though wholesaling is a great option to make quick money, you still need to understand the process and the pros and cons. I've broken it down for you below.

Pros of Wholesaling

  • No credit necessary. To be a wholesaler, your credit and your credit history don't matter. You are simply the liaison between the buyer and the seller. You get paid a fee at closing for assigning the purchase contract you have with the seller to the buyer.
  • A great way to get your feet wet in the industry. When you're a wholesaler, you are constantly networking and looking for potential buyers. This gives you insight into what buyers want and what they don't want. Thus, allowing you to learn from people who are doing what you'd like to do and are more experienced in the industry. These investors can possibly become your mentors, if you decide to prove yourself worthy to them and add value to their efforts in a creative manner.
  • Opportunity to get the know your city/market. As a wholesaler you are constantly on the lookout for potential homes to call a deal. This opportunity to get to know the different areas of the city is HUGE. You see the areas that are hot and the areas that are struggling. You also get to learn from the city/county plans for expansion in the future. Use this "inside information" to your advantage and keep these things in the back of your mind. You might just find your first real estate flip in the process!

Cons of Wholesaling

  • No guaranteed income. Beware! This isn't your typical 9-5 job. You're not guaranteed a paycheck every 2 weeks or every month. There is no health insurance or retirement benefits that come with wholesaling. Knowing your financial situation and investment mindset is critical here. If you have a full-time job, wholesaling part-time is a good idea until you can consistently close a few deals a month; at which point, making a transition to a full-time real estate investor may be a good option.

  • Not being able to find a buyer. Having a solid buyers list is huge in order to be successful in wholesaling. No buyer = no deal = no money in your pocket. If you find a great deal, your earnest money is at risk if you write up a contract with the seller, but are unable to find a buyer. The best way to build a buyers list is to attend networking meetings, meetup groups, and events where real estate agents, realtors, wholesalers, builders, and other real estate professionals gather.

  • Being on top of an organized buyer's list. This is huge. In wholesaling your business is built upon your connections and your reputation. You build your reputation up by knowing the different preferences of each individual buyer. There are a lot of tools out there to help you stay organized and keep these lists in line but if you're not that person then wholesaling isn't for you. 

A quick tip: If you think your deal is located in an area where it would make a better rental than a rehab flip to a homeowner, consider selling the property to a landlord looking for cash flow rather than maximizing the ARV (After Repair Value).

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Rehab

Rehabbing a property requires significantly more finesse and operational expertise. You are essentially taking what other people don't want and creating something they highly desire. This can be really cool if you're in the position to make it happen and if it fits your investment strategy. Check out some of these reasons below and see if it's the right move for you.

  • Rehab for when you can comfortably reach maximum profit from the deal. What do I mean by this? Rehabbing a property can definitely take some time but if it's the right time in the market and you do it right, it's absolutely worth it. Watch out for real estate agents, wholesalers, and other parties selling you deals in a hot market which they claim are money makers. Most of the time, deals in hot markets are overpriced. Don't get caught in this trap! If you can't comfortably capitalize on maximum profit from a rehab because of market conditions, consider passing on the deal. I'm currently exiting all of my positions on flips and focusing on residential development in secondary markets along with single-family rental (SFR) and multi-family acquisition. Why am I making this move? Get in touch with me and let's talk about it.
  • How’s your bandwidth? If your deals are scarce, that means you’ll have a lot of time on your hands. A good way to spend your time would be to rehab the deals you have.
  • Do the math. Running the numbers is always important but especially when you're deciding between wholesaling and flipping. If the potential profit is good, but not good enough to make your profit goals plus a wholesale buyer’s minimum then rehab.
  • Explore the area...if it’s in a desirable area, then rehab that desirable house! This is a time when having a network is important. Before you even finish the flip, you can line yourself up with an investor who wants to buy and hold the property to rent it. I'm also connected with Chinese buyers who are looking to purchase SFRs in bulk along with individual homes for themselves. A strategy I've deployed recently is as I'm finishing a rehab, I'll send the details over to my Chinese contact who'll determine if it makes sense to pre-sell it without listing on the MLS! It's amazing. 
Read   [RADIO] Community Investor: Planning Your Exit Strategy with Your Property Investment

Completing improvements will immediately force your investment property’s value to increase exponentially, and thus making it easier to sell. But, rehabbing is not just an exit strategy, it’s a business!

You make money by doing your research, developing a detailed rehab budget and operation plan, and managing the process. You need to know your market, repair costs, exit price, and be able to tackle problems that arise during the journey. You should purchase your target far enough below ARV to make sure you have plenty of room for contingencies and a reasonable profit for your efforts.

Everyone likes formulas, so here's my formula to buy a rehab deal in a hot market:

Purchase Price = (60-65% x ARV) - Cost of Repairs.

Then, you need to complete repairs and sell FAST. Like anything else there are pros and cons to the rehabbing strategy. Let's review a few!

Pros of Rehabbing

  • Gaining experience. While wholesaling is an excellent teacher, there is no comparison to what you will learn doing a flip. During a rehab you will learn a great deal about construction, the market, working with city inspectors, permitting, and working through unanticipated challenges.
    • You might be thinking, what do I care about construction? I won't be doing that myself. Well, in flipping and in real estate in general, understanding the costs of construction and home repair is imperative. During a rehab, you will learn about the costs of materials, various plumbing and electrical repairs, and an eye to catch bigger issues such as structural damage. These are all critical issues you might not have otherwise known about that can cause you headaches down the line. Understanding this and creating a system around it will come in handy if you purchase rental real estate as knowing . 
    • Knowing your market is and always will be crucial. Doing market research and talking to other investors in your area when you are getting started is important. Keep in mind that what you might personally like isn't necessarily what the market likes. It's all about the homeowner/buyer. Once you've done your research and have an idea of what types of properties work well, this is when your success as a flipper will only continue. Pay attention to what buyers say about the property once you put your home on the market and use this as a learning for the next flip.
    • One of the greatest lessons of flipping is learning to budget for unanticipated costs. From beginners to seasoned investors, this is always tough. As you flip, you will start to understand the importance of budgeting for little things you didn't think would be necessary, such as: building permits, construction delays, delivery of materials delays, contractor disputes, and holding costs if you aren't able to see the property with the turnaround you had in mind. These things are part of the business, but with experience you can budget for them and have realistic expectations for yourself and potential buyers.

Cons of Rehabbing

  • Losing money. The whole point of all the work you put into the rehab is to make a profit right? Of course. Unfortunately, there a few things that can happen to prevent you from getting to this end goal. Think: unanticipated expenses, taxes, & holding costs.
    • One of the big reasons for losing money are those unanticipated expenses we talked about above. While it's a great learning lesson, it's also extremely costly and if you didn't budget for it you're at a risk for losing a lot of money. Do you due diligence here to prevent losing money this way and have a rainy day fund ready just in case. 
    • Taxes can get you in more than one way if you're not prepared. The first is the city may increase your property taxes after the rehab is complete. If you're not finding a buyer right away this can hurt you because you'll be paying the taxes in the meantime. This increase in taxes might also detour a potential buyer if they weren't expecting it. Be completely transparent with buyers about taxes. Don't try to sneak it in as it could cause the deal to fall through at the end. The second thing to watch out for is your investment property being subject to capital gains taxes. There are ways to postpone the taxes owed but they're not going away so planning for them to avoid a surprise is your best bet. Make sure you have a professional CPA on your team at all times.
    • The holding costs of a property when you're having difficulty selling. Keep in mind that until the property is sold you're responsible for the mortgage, taxes and insurance. Along with this to keep the property in good condition you will also have additional maintenance costs such as lawn maintenance and depending on where you live, the snow may need to be plowed. There is also the potential of having to lower the price the longer it sits on the market, cutting into your anticipated profit.

The Bottom Line

Like most things in life, there is no magic answer to rehabbing vs. wholesaling real estate. It all depends on your long and short-term goals and your market-specific strategy. There are, however, some things that can point you in the right direction.

Are you looking for quick cash? Wholesale.

Do you have time and resources on your hands? Definitely rehab.

Decide what's going to work for you and then get out there and do it because I can assure you there's no profit to be made sitting on your couch and watching your favorite flipping show on TV.

What You Will Learn

  • Wholesaling - Pros & Cons
  • Flipping - Pros & Cons
  • Formula To Buy A Deal In A Hot Market
  • The Bottom Line