Be Careful Not to Over-Improve!

From the desk of C,J Lauria

Boy, can we make a house shine when we throw some money at it!  In the world of real estate investing, though, investment properties must be profitable.  Without a clear understanding of certain basic investment principles, your real estate home business can quickly transform itself into no more than a very expensive hobby.

In past articles I have spoken about focusing on repairs – not remodeling.  This is mostly most true in cases of the average and below-average investment properties.  Even when handling a higher-end property, caution is needed so that your precious profits are not eaten up entirely.

Remember, you are still in business.  These homes aren’t your personal residence.

I recently spoke with a new cash buyer who had sunk $1.1 million into a high-end property.  I’m sure it turned out very nice, but he ended up selling it for exactly $1.1 million.  Here we go again:  The entire project became no more than an expensive hobby.

There are some very good rules you can go by when determining what to do when you buy foreclosures or any other distressed properties as an investment.  First, consider the street that it is on.  What do the other houses have.  Do they all have new windows?  Then replace the old windows in yours.  If not, you may be over-improving and that money will come from your potential profits.

Second, room improvements that traditionally attract the most attention are the kitchen and baths.  Standards are constantly changing and these rooms are where people generally look first.

Also, keep in mind the likely future use of the property.  Is it best suited as a rental?  Then use more “bullet-proof” materials rather than the more “comfy” finishes you might prefer in your own home.

Finally, remember to repair what’s broken but think twice about replacing anything.  The exception to this rule is when replacement is actually cheaper than the cost of repair.

If you are preparing to “flip” the house, make it a nice, quality product.  Keep in mind, though, that you are not going to live there and the people who buy the house are most likely going to make changes anyway.