CHICAGO– Newcomers to real estate investment often ask “How do you tell a good rehab opportunity when you see one?” I’ll be shown advertisements for properties touted as "handyman specials" and "great for rehab!" The questioner’s instincts are correct to question these marketing ploys.
Realtors generally identify the Handyman Special as a property in cosmetically poor condition, in need of minor repairs, updating and decorating, but otherwise similar to its neighbors. In most cases the asking price is about ten percent under the market value of the property if improved. The Handyman Special is often a real opportunity for a first time home buyer to buy at a modest discount and benefit from‘sweat equity.’
Unless there is some reason compelling the seller to put the property on the market, some ‘special situation’ that will drive down the actual selling price, I and most other professional investors and rehabbers will generally pass on the Handyman Special. From our perspective, the necessary Margin of Profit just won’t be there. In my business, I look for distressed properties – properties that FAIL the Handyman Special Test, that are in need of serious repair. In Chicago such properties are often vacant and boarded; many are in Housing Court and in risk of demolition; and most have been foreclosed upon.
Both investors and rehabbers benefit from buying and rehabbing distressed properties. The investor is purchasing or creating a long-term income stream that will maximize return on capital. He wants to earn as much passive income as possible on every dollar invested. Long term appreciation and tax benefits are desirable yet residual benefits.
For the investor, a distressed property provides unique opportunity. Properly structured, within months, the savvy investor typically will have little or no actual cash investment in their property. Consequently, the rate of return on their capital (from rents) cannot be measured – in a sense it is infinite. But be assured: the net asset value, the equity is real. Wealth has been created.
Rehabbers, on the other hand, are driven by short-term profit objectives. They improve the property for resale at a profit. Understanding the costs of needed repairs and improvements, the rehabber knows exactly how much to pay for the property to achieve his profit objective.
The skilled investor/rehabber does not guess; he’s not a gambler. By understanding the market and the costs of needed improvements, he is able to move quickly in a competitive marketplace. Whether for sale or investment, the informed rehabber always ‘buys right’ because he knows how the numbers work.