A novice investor makes an honest mistake while remodeling her home to sell for profit. Her failure was partially due to a lack of understanding about "payback value" or "cost recouped."

There is a really interesting article by a real estate investor who lost money "fixing and flipping," laments her mistakes, details her loss and resolves not to make those mistakes again.

Not understanding how much can be recouped from remodeling projects is an honest mistake many rookie real estate investors make.

Payback value--how much you recoup from a remodeling project--depends heavily upon the real estate market and prevailing property values. If the market is slow, expect to see less payback than you would in a fast market. Also consider the neighborhood: if you remodel your house to twice the size of the other homes on the block, it is unlikely that you would be able to sell at double the price. Issues that can influence payback value include the type of improvement, scope of improvement, desirability, and cost.

But let's be practical so our readers have a real "takeaway" from this article.

One of the best investments is to install new siding. Nationally and locally, you're likely to recoup upwards of 95% on this single improvement. 

Consider replacing the heating or AC system (assuming they need replacing or aren't there). The average payback for a new heating system is nearly 100%! A/C is closer to 75%--which is not bad. Of course, depending on where you live, this could make or break your sale.

Minor improvements to kitchens and bathrooms are outsanding investments. (We don't recommend moving the bathroom, like the writer of this article did.) These include fresh paint, new flooring, upgraded fixtures and new appliances. In fact, minor kitchen remodeling yields an average payback of 90%.

What will hurt you? 

• Finishing a basement will yield almost no payback.
• Upgrading or adding landscaping has an average payback of 30-60%. Let the buyer decide how she wants the lawn to look! 
• Adding a family room is hit or miss. Use your judgement.
• And everyone knows that adding a pool to the backyard is not a good idea.

Manage your risk.

One of the ways we help investors manage risk is by preparing a net sheet. If, once we've factored in your costs to improve, update or remodel, the numbers don't work, we don't encourage you to buy! It's really that simple.

Set a remodeling budget and we can help you do this or put you in touch with some of our experienced investors. Use your imagination, but be realistic.

Do you have experience flipping properties? Share your stories in the comments, or email us if we can answer any questions.

See you next time!

Leigh Wilson
leigh@boisesbestRE.com
www.BoisesBestRealEstate.com