Investment Property ROI: Why Going Beyond Your Network of Friends Is Critical

The recovering residential housing market continues to offer lucrative investment opportunities for first time and experienced investors looking to fix and flip a house. However, a new challenge is emerging out of the recovery: a shrinking tolerance for mistakes. The single largest mistake beginner real estate investors make today is trying to do it all themselves or relying too heavily on friends and family to execute on the real estate investment.

Sometimes a friend may have a knack for what color to refinish the hardwood floors, or who to use for repairing a roof, but rarely do these close acquaintances come to the table with the focus on return on investment (ROI) necessary to be successful today. First time investors often worry that going outside their circle of friends and family to find a vendor partner to run property rehabilitation might cut into profits. This wasn’t as much of an issue when the fix and flip market exploded during the economic downturn and profit was nearly guaranteed. Investors who purchased properties in 2007 or 2008 were making money and gaining valuable experience — the market was hot and purchase prices reasonable so novice investors could have made any number of mistakes and still realized great returns on their investments.

Assessing an Ever-Changing Market

Property values in many regions of the country have recovered and fewer distressed properties are making it to the market so the market is less forgiving. Those who were investing in the downturn learned their lesson and what mistakes not to repeat when the margins were far wider than they are today. Investors who are now counting their fix and flip successes in the double digits resoundingly say an investor must be able to make an accurate assessment of the property’s value and calculate a realistic cost for the rehabilitation — and execute to achieve the desired margin. When it comes to investing, working with the right vendor partners — from appraisers to contractors to suppliers — was the hardest lesson learned.

There’s no easy way; investors have to be ready to work and understand and mitigate risks across the investment lifecycle. They also need to know that their insulated network of family and friends may be free or ready to do a project at a discount — but they may not be the best people to turn to. Many investors think the more work they can do themselves the more ROI they’ll see. Evaluating new vendors takes time — but it can be time well spent if it makes an investment much more profitable by avoiding lost time and revenue from the mistakes less experienced investors and their friends are likely to make.

Third party experts can provide immediate pay-off by utilizing proven best practices and proper planning which can go a long way towards avoiding big mistakes. Appraisers can help determine as-is and after repair values and a general contractor can ensure you are receiving a proper assessment of rehab costs. Investors can use this information to determine whether the property has the potential to achieve the returns they are seeking before buying.

Once it is determined that the end product can achieve the desired ROI, a knowledgeable and reliable team of professional partners are critical for keeping a project on track to actually deliver those returns. These include an array of service providers, such as valuation companies, real estate agents, materials suppliers and most important, a general contractor attuned to the local market.

General Contractors: The Key to Achieving ROI

The single greatest lesson successful real estate investors have learned is how to hire one of the most important vendors: the general contractor. To do this, an investor must look outside their network to evaluate contractors and find the right fit. The investor’s cousin who is handy with a hammer may not be the right choice. Hiring an experienced, professional contractor at the outset ensures their experience in the market is going to help improve the bottom line when it comes time to sell or rent the property.

Choosing a contractor begins with a background check to identify if they have had a recent bankruptcy or foreclosure events, any fraudulent or criminal activity on record, and is financially solvent and capable of seeing your project through completion. The investor should ask for a minimum of 5 references and call each and every one of them. Let me repeat: yes, 5, and yes, call everyone one of them. Keep in mind that the references supplied by vendors are almost always likely to be positive, so as you narrow the list, be sure to go see some of their work in person.

When rehabbing a property the investor also needs to know they are hiring a renovator, not a builder. A novice investor should have someone running their project that has performed rehabs on similar properties. They want a contractor who knows the neighborhood. This is important as they will know the finishes that are consistent with the surrounding homes and won’t recommend granite countertops when this would be the only house on the street with that expensive upgrade. Additionally, they should know the local climate enough to know there may be particular issues, such as mold. This may seem obvious, but investors moving from the Sun Belt to the Rust Belt — following markets primed for fixing and flipping — are not uncommon and unfortunately they are not aware of risks inherent in the new market as their knowledge doesn’t always transfer seamlessly.

At the end of a project, when the property is sold, the lessons learned with a network of skilled vendors on the team will have prepared the investor for their next project — not sitting back reviewing the laundry list of mistakes and who to hire to fix them. By hiring the right experts, from appraisers to contractors to suppliers, investors can find success and then share it with friends and family as they choose — a much better outcome.