Hidden Remodeling Cost
By: Greg McKinney Mineola TX
When I first started investing in real estate almost 30 years ago, I was shocked at all of the costs that were associated with purchasing and selling real estate. If you are just getting started investing in real estate and you intend to purchase your first investment property for a rental or to flip, there are many costs people tend to forget when starting a home remodeling project.
I'm Greg McKinney from Mineola TX and I have been remodeling houses in East Texas for almost 30 years and one of the big costs people tend to overlook are closing costs. I'm not referring to just closing costs when you purchase a piece of property but also closing costs when you sell the property. Depending on the purchase price and resale price of the home can add up to thousands of dollars. If you use a realtor to resell the property for you the cost can go up significantly.
Before purchasing a piece of property, investors should do their due diligence and speak with a closer at their local title company. Ask them what the average closing costs will be for the approximate purchase price of the home you are considering. Next, ask them approximately what the closing cost will be for a higher priced home which will hopefully be what you will be selling your home for after the remodel is complete. For example, if you purchase a home for $50,000 you may have $2,000 in closing costs. When you go to resell the home for let's say $100,000 you may have approximately $3,000 in closing cost if you do not use an agent. As you can see from the example you will need to calculate about $5000 into the cost of your project.
These closing costs can vary greatly from one title company to the next and the costs will be significantly higher in some areas of the country as opposed to others. Another thing to keep in mind are the lender fees. If you will be financing your project speak with your loan officer and obtain a detailed cost breakdown on your loan. Also calculate approximately how much your daily interest will be during the time you have your loan. Always calculate you will be paying 12 months’ worth of interest into your expenses. This should give you plenty of time to remodel the home and then resell it. I always like to overestimate expenses on a project so I’m not as surprised when the project runs over budget. Which it always does. That is why it is so important to purchase the home at the lowest price possible to give yourself a cushion incase things do not go as planned.
Spend as much time as possible analyzing your market as well. If you have a good relationship with a local real estate agent, I will ask them to pull comps, or comparable sales, on properties that have sold within the past 6 months in your area. I would specifically look at the comps located nearest the property you are considering buying. You can also speak with local appraisers in the area who might be willing to help you. An appraiser would be a great person to build a relationship with. I strongly suggest hiring them to appraise your properties after you have made the repairs. They can give you an accurate value of the home prior to putting it up for sale but they can also be a very valuable resource when you are looking for investment property to purchase. However, you do have to be careful with appraised values of homes. When an appraiser does and appraisal on a home, they are allowed to pull comps from miles away when preparing their appraisal. This is nice when you are trying to sell a home and you need it to appraise for top dollar, but it can also give you an unrealistic value for your home in your specific neighborhood. So, when you ask a real estate agent or an appraiser to pull comps for a home you are interested in purchasing make sure the comps are as close as possible to the home you are interest in buying.
So, in summary, make sure you contact several local title companies prior to purchasing your first investment property for a more accurate breakdown of the estimated closing costs and also get detailed costs from your lender. Also, get to know a local appraiser in your area.
I just wanted to pass along this little reminder to new investors. Hope it was helpful.