Rehabbing 101: Don't Be Fancy

Perhaps the biggest mistake that plagues rookie rehab investors is the tendency to aim too high. In the spirit of improvement, it can be very tempting to put in marble floors or an exotic granite slab countertop. Don't do it! While these improvements can add luxury and a sense of status to a house, investors who aim to rebuild Neuschwanstein are losing sight of the goal of rehabbing: to bring a property back to liveable condition.

There are very few investors who make a living by turning perfectly-usable houses into cutting-edge design spaces. It's certainly true that the latter will often command a higher price on the market than the former, but for 98% of real estate investors, there are far too many drawbacks to the golden egg approach.

1) Cost - These high-level improvements are, by definition, more expensive to implement. They may entail advanced planning, custom-built parts and pricey construction fees. Even if they don't, the price of the materials will not increase property value by as much (percentage-wise) as the standard "take it out, put it in" approach. Most homebuyers will pay a lot of extra money to move into a good house, because they don't have (or don't think they have) the time or expertise to rehab their own house, and want to be able to use the property immediately. When it comes to bells and whistles, they are no longer paying for convenience, but for luxuries, which brings me to the second drawback.

2) Inappropriate for the Marketplace - As is evident from the sheer number of foreclosure proceedings, it's already tough enough to keep up with mortgage payments for many people, and there is only a very small segment of the buyer marketplace that can afford to pay extra money for frills. Although many people can pay a few thousand extra for a pristinely-renovated house, only a small fraction of these buyers can (or will) pay much more than that. This fraction is also difficult for investors to access because these buyers are often interested in custom-renovating a property just the way they want it, and some may even want to have a custom house built for them. Every shiny, unnecessary addition reduces the size of the resale market at the end of the deal.

Another problem is the fact that few neighborhoods are suitable for the really elegant houses. As a general rule, make houses blend in with their surroundings.

3) Time - Auren Hoffman has said that, for young people, time is more important than money. I think that for all real estate investors - young and old - time should be a principal consideration. There are a lot of potential deals in the marketplace, and you would be well-served to aim for many effective and profitable deals than a few big ones. Standard materials are so useful for that very reason: they are almost universally-usable, and the construction industry is best suited to work with them. Anyone who's seen Flip This House can attest that simple changes can become complicated in a hurry, and it'll do your mind and your calendar a lot of good to stick with what works. One of my favorite bloggers, Ramit Sethi (who's also one of the founders of PBwiki), likes to ask "do you want to be sexy or do you want to be rich?", and with the potential complications and slower resale (because of the smaller buyer's market) that come with ambitious renovations, it's wise to let your business make you rich, and to be sexy and stress-free during your other life.