Protecting Your Real Estate Is Good Business

 

We like to promote positive business principles here, including protecting your businesses and assets so that you don’t have any degradation with income or any depreciation.

One of the most common wealth building methods is through real estate.

Although there are several ways to build wealth in real estate, there’s one common factor  — it involves a physical property.

If you’re someone who is investing in a project house or simply trying to flip a home for massive returns, a lot of what you’re doing involves numbers, and making sure those numbers are right.

There are two common things that people tend to forget about when investigating a deal.

They are so concerned with the purchase price, the rehab cost, and the stack of bills they’re going to make as profit that they forget to protect their investment.

Insurance can save your deal

Like with Hurricane Harvey or with the more recent Hurricane Florence, flooding has and will always occur.

The worst is when you’re in the middle of a project and your house gets flooded.

Worse yet is if you have several rental properties and multiple get completely flooded and need massive overhauls.

In both storms, there were plenty of rental houses that didn’t have any flood insurance, which meant that they either had to get rid of the properties (how ironic) or had to come up with the repair costs out of their own pocket.

The ones that did have insurance?

Well, they got off pretty well.

They repaired the home and got to keep some cash in their pocket.

Flood insurance is massively important for seasonal things like this, and home owners insurance will help cover issues that might happen with a home, especially if it’s an older one.

Home inspections will reinforce your numbers

While insurance gets put into place when you already have the home, we have to consider the beginnings.

When checking out a house, a lot of new investors make mistakes when understanding what state the house is in.

Veterans also tend to get things wrong if they don’t know quite what to look for.

Some issues with homes tend to be things that you can’t yet see.

They’re bubbling up to the surface over time and might sprout only after the investment has already been made.

Home inspections can use certain tools, like thermal cameras, to identify potential issues in walls.

They also have a large checklist that goes over many points of the house, knowing what to look for, and how to identify hidden issues.

Common ones include electrical wiring, foundation, plumbing, and infestations.

These are all things that can be hidden until something happens like an electrical fire, a leak, or termites are suddenly eating up your front door.

Any of these things can set you back several thousands of dollars and ruin your deal, potentially causing you to pull out everything you would’ve made in profit.

That’s not OK when it comes to investing, and it’s easily avoidable.

Getting an investor-friendly home inspector to check out the property before you sign the contract can prevent all these unexpected costs from surprising you.

Keep your numbers realistic

If you’re going to flip a house, make sure that you have your numbers as realistic as possible.

Consider the position of your lender — how are they going to ensure that there’s enough buffer and spread for everyone involved?

Lenders know that flippers tend to be optimistic on their numbers.

The ARV is a bit high, the repair costs are a bit low.

So, what is the best strategy for them?

They take the ARV and deduct 20% from it, and they take the repair costs and add 20-50% to it.

What do those numbers look like?

That’s how they’ll assess risk, and they’ll judge it based on how close or far it is from being way too tight.

If there’s not enough money in that spread, then they know to what degree mishaps can occur and how much money will be left over.

At that point, some might actually categorize deals in tiers, knowing which is a low-risk compared to a high-risk.

So factor that in when you take a look at a property.

What would your lender think, and how would it appear to them from their perspective?

They have to make money, too, else they wouldn’t be interested in lending to you.

Cover your bases and you’ll be alright

These tips are important because they can bring you three different angles on protecting your investment and picking the right deal.

Knowing what state the structure is in, protecting it with insurance (and knowing the costs of doing so), and knowing the numbers so your lender will be comfortable are all good practices to make your deals run as smoothly as possible, despite any drawbacks that may occur.

We’ll continue to post more about real estate here, so be sure to look for updates on our homepage!

Here’s a video related to asset protection, which is just as important when it comes to managing your real estate properties: