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How Much Is That Next Investment Home – Real Estate – Calculating Renovation or Rehab Costs

How to calculate rehab costs of a property? This is another question Real Estate investors ask quiet frequently. So I’ll try my best to answer them here so others can benefit from the answers.

Your rehab costs will all depend on how much of a repair project it is and if there is any major repairs that might need to be done. Another factor will be if you plan to do the work yourself and create “sweat-equity” or hirer out to a sub-contractor or a more expensive general contractor. If you’re half way handy and you have the basic hand tools that would be used around the house, you can probably do most of the work yourself and save thousands of dollars. In the past, I’ve even thrown in a small fudge factor of $2000 to $3000 just in case you find something more major after tearing into the project. You never know what else you might find when you tear out a wall or start ripping out the kitchen cabinets. The fudge factor can sometimes save you on your profits. And if it’s not needed, you will have that much more a profit margin built into the deal.

Always check with your local zoning and other laws to make sure you can perform the work in question.

Now I’ll admit, carpet and roof replacement are not something I’ll ever attack again. For one, a roof is hard work, and as far as kicking carpet, that’s another skill I’ve learned that I don’t possess. One of my tenants back in the early 2000′s told me that the carpet had a small wrinkle in the middle of the floor, she wasn’t too worried about it because the coffee table covered it. She said whoever you hired to lay the carpet, she didn’t suggest that I hire them again. I never had the heart to tell her I was one that did it.

Some states require certain things to be done before a mortgage can be funded in that state. Always check with your local real estate attorney, closer, title company, or real estate agent for what might be required. These inspections, tests, and results will have to be added to your overall rehab costs.

I’ll give you an example; In South Carolina and most of the south eastern states, you are required to pass a termite inspection prior to closing. Depending on how you obtained the property, you might not have had a conventional closing, meaning the home inspection was never accomplished when you acquire the property. Since I obtained the property in a creative, non-conventional way, I was the only one to do any type of inspection, and I did that from the west coast. But, after you rehab the property and try to sell it to a future owner, the issue hits you in the face, not good if you’re not ready for it! In the early 2000′s I learned my lesson hard by gaining a $16,000 bill that had to be accomplished prior to closing on the property. To say the least, the entire deal was a loss.Â

I wrote a simple spreadsheet tool that I’ve been using since the late 1990′s to help make estimating and listing items that the property needs easy. It can run on your computer and your smartphone and you can edit it on the fly. It lists almost all the normal items that you might need for a rehab project. You can fill in the square footage of the property room-by-room and the program will give you how many gallons of paint are required and the cost for the paint. And even calculate the amount of ceiling paint required in a separate column. Of course, you’ll want to save money by buying the 5 gallon buckets instead of the gallon buckets, so it will over estimate your price on the paint by a little. So just be aware of that.

Walking through the property will usually tell you what’s needed as far as repairs. If you locate a property that needs a lot more than just cleaning, cosmetics, painting, and patching, you might want to pass on the deal if you’re new to the Real Estate investment arena.

In the next article I will address closing costs and holding fees of a Real Estate investment.

How to Keep Your Spouse Safe in Business

As a structuring adviser to investors and business owners we often come across a widespread mistake that many people make.

That is a spouse being offered as a guarantor to the financial institution, landlords or creditors of a business. Often their personal guarantee is even needed for the agreement to proceed yet it is given.

Why? Because the advisers do not defend you and point out that it’s not required.

The upshot is that if total business or investment collapse happens, both spouses are fully liable rather than just one. Sure, the creditor, bank or landlord asking for your spouses guarantee will explain it is necessary 100%.

This is because it is in their. Yet it is not in your interests. My advice is NEVER give your spouses guarantee in business or property transactions if you can keep away from it.

I have developed over 80 million dollars in property, and guaranteed a number of numerous business and banking obligations, purchased multiple investment properties, – and my wife has never signed a personal guarantee on the transactions. Why?

To protect her from the potential risk and obligation. How did I avoid her being liable? By saying ‘no’ to the banks and creditors when they asked. Did it interfere with her legal or matrimonial rights to recuperate the property if we separated?

No, — she still receives the assets because she jointly controls the Trusts and numerous borrowing. This is not about removing power away from your spouse and potentially wealth, it is simply to do with reducing your risk to your family.

Examples of this include:

1. Borrowing funds from a lender to buy an investment property or even your family home. If one spouse is a homemaker, has no income or their income is not required to meet debt servicing criteria of the bank, then why allow the bank to take their guarantee?

The only purpose of the guarantee will be to use more pressure to your household if you have difficulty, and both spouses go bankrupt rather than one (which may be viewed as malicious in this light).

2. Handling land-lords when it comes to commercial leases and guarantees. Ensure you attempt to divide leases out into separate ‘tenancy companies’ and make one spouse a director of this company.

Your opening position should be no personal guarantee, and if ‘no personal guarantee’ is a deal breaker with the landlord, then only the director/one spouse gives a guarantee.

Try not to give an unlimited guarantee, limit it to say XX months rent, or a fixed sum as a cap.

3. Dealing with creditors over personal guarantees. Creditors in business will normally ask for a personal guarantee.

Decline to give it if you can get away with it, and most of the time you can. Where you have to give one, just as with a landlord ‘limit the guarantee’.

In summary, protect your spouse from liability if you can help it. Personal guarantees and spouses should not go together. If you are negotiating with a landlord or creditor as a business owner and have to supply a guarantee, try not to give a guarantee at all, or limit the guarantee to a fixed sum

(Eg: 6 months rent. If your spouse has no income, you should be able to avoid their guarantee being given to a lender/bank)

Try using a mortgage broker to achieve this. Usually the banks (if dealing direct) will be very difficult to manage on this issue, especially in this recessionary climate.

How Much Is That Next Investment Home – Real Estate – Calculating Holding/Closing Costs

How to calculate double closing and holding costs of a property? This is another question Real Estate investors ask quiet frequently. So I’ll try my best to answer them here so others can benefit from the answers.

Holding costs are what the property will cost you while you are trying to get it fixed up and rented or sold on the market. If you are in a soft market, or a time that it’s hard to sell, you might also figure in an amount slightly under value when you sell. This way, you’ll be able to cut down on your hold time and costs. I always try to put a property on the market for around $3000 to $5000 under market value. This way the property will usually sell in under a month or so. Again, this all depends on the property location and the economy for the area you’re currently in.

Are you planning to flip the property back on the market or hold and rent for a long term passive income? If you plan to hold and rent the property out, you will need to perform a rent survey of the area to see if the rent will exceed your mortgage payment. A rule of thumb I use, if the rent you can collect is at least $100 to $150 over your monthly debt service or mortgage, you are breaking even. So don’t spend that money. Most homes will require from time-to-time at least $1200 to $3500 in expenses during the year. Let’s say the furnace or water heater dies, those can be your largest expenses when it comes to home ownership. It’s always a good idea to run a rent survey even if you are just flipping the property, just in case you have an issue selling, you will have more options down the road.

You’re buying and selling or closing costs will consist of taxes, insurance, appraisals, title fees, and insurance, real estate agent commissions, attorney fees, wire fees, tax pro-ration, and much more. Remember, if you are flipping a property, you will be paying these fees twice! It will be once when you buy and once again when you find your end buyer. You must figure these fees in at the beginning to know where your profit margin will be at the end of the deal. In Wyoming the closing fees on a typical $100,000 home would be around 6% of the after repair value of the home.

How long will it take to turn the house around, which means how long to fix it up and close on the property or get it rented out? This will be your holding costs. Most single family homes should take no more than 3 months to fix and sell to an end owner, unless you run into a major repair that might take you longer. On average, I’ll figure in 6 months hold time just as a safety net. Remember, your hold time is based on what the current payment is per month for that 6 month period. Calculate this amount in the deal from the beginning.

Something as simple as closing and holding costs, I’ve seen more investors forget these important things, you have to close twice – once as buyer and once as a seller, and then on top of that, you have a payment each month while you are trying to get all your fix up done. The longer you have to hold a property, the less profit you will make in the end. And if the sell doesn’t work out, you can always rent the property and cut your losses. It’s always nice to do your rent surveys before going into a deal, just in case you can’t sell fast at the end. This way you always have other options, options are nice to have. You can sell fast year around, if you have your price set correctly. Most of the time, the winter is a slower time for buyers, sellers, and renters, just keep that in mind. When you go into a deal, and the hold time puts you in December, you might have a hard time selling. Most people will avoid moving over the holidays, there’s just too much other stuff going on at the time. So just keep this in mind, your market will slow slightly during the holidays and even the winter months themselves.

In the next article I’ll cover what we went through in the last three articles. I’ll put it all together into a simple formula that will work with most single family home investments. I will also discuss your profit margin in the investment.