Once you begin your investment project and you have your water-tight plan in place, that’s it, right? Nothing is going to change.
Well, we certainly hope that’s the case, but every now and then issues can pop up. This can be nerve-wracking, but if you know what to expect and how to handle it, it shouldn’t set your deal back too much. The number one piece of advice we can give you is to always have enough operating capital, generally around 10 to 20 percent of your budget, that is there for you to use in case something unexpected does come up. Here are a few factors that have the potential to change your deal midstream.
Value & Functionality
When you’re first starting out with your rehab, it can be hard to picture the finished product. It might look perfect in a 2-D drawing, but once the building commences and the house starts coming together, you might notice that certain issues begin to come up. Typically when you’re framing you get another chance to visualize the property and that’s when you want to make these decisions to save money. Functionality of the home is extremely important, so make sure that’s always in the forefront of your mind. For example, we had an investor that was working on a complete rebuild, and once the master suite closet was put in, he realized that it completely obstructed the view. A small tweak in his original plan was able to improve the home’s view, drastically improve the functionality and ultimately increase the home’s value.
Real estate is a constantly evolving and changing market, which means there is a chance that these external forces could cause you to have to change something in the middle of your project. For example, if someone else is completing a rehab in the same area, and lists a 5-bedroom home for the same price you were planning on listing your 4-bedroom home, your plans will have to change in order to meet the market’s demands. If it is early on in your rehab project and you have the space, you could opt to add in a 5th bedroom. However, if the structure of the home is already complete, it will probably be too detrimental to go back and change the layout. In this case, you will have to consider adjusting your sales price.
There are some instances where unexpected and unforeseen circumstances arise in the middle of the project. The most common place for this to happen is when you are rearranging walls. Walls can hide issues that you would never have seen when you walked the property. There could be faulty wiring, termite damage, or an unstable foundation. These changes while not extremely common, are the ones that can completely unravel your budget. If you have a good amount of operating capital to fall back on, this will be a little easier to handle. After all, you can’t simply put a Band-Aid on an issue like this – no one will be interested in buying a home with a poor quality renovation.
Understand the Jobs
If you’re new to the industry, it’s a good idea to have a working vocabulary and basic understanding of the renovation process. The more you know, the better your advantage during the deal. Even if you hire a general contractor to complete all the work, it’s best to be involved in the process and have a strong understanding of the steps your contractor is taking.
At Washington Capital Partners, we see more deals in one month than most investors will see over the course of an entire year. Because of this, we have the experience to help you not only fund your project but also with anything that may change midstream. We can provide you with whatever resources you may need if an issue arises during your deal. In addition, with our extensive experience in the industry, there is a good chance we have seen and solved a similar problem before, and we fully understand that you cannot compromise on an issue in a way that will negatively impact the sale of your property.