Lessons I Learnt When Buying My First Property: “Not Every Undervalued Property Guarantees Profitable Renovation”

December 28th, 2023

Back then as a new real estate investor buying my first property, I was eager to find a good deal – a property that seemed undervalued where I could renovate and “flip” it for a nice profit. However, I soon realized that not every undermarket property, even after extensive renovations, will guarantee a profitable sale. Through trial and error on my first investment property, I learned some hard but valuable lessons about carefully crunching numbers, understanding market cycles, and avoiding overestimating potential returns when taking on a fix-and-flip project.

Lesson 1: Thoroughly Crunch the Numbers on Purchase Price and Renovations

When I found what seemed like a good deal on a run-down property in a popular neighborhood, I jumped on it without completely crunching all the numbers. The purchase price seemed below market value, so I estimated I could put 40-50 thousand dollars into renovations over 6 months and then sell for a nice return. However, once deep into the renovations, I realized my initial budget estimates were way off. After plumbing repairs, new floors and countertops, paint, fixtures and necessary structural repairs, I had put over 70 thousand dollars into the property. The extensive repairs also took 9 months instead of 6. I learned I should have done more due diligence upfront on accurately estimating renovation costs and timelines.

Lesson 2: Understand Market Cycles When Estimating Resale Value

While fixing up the property over 9 months, the real estate market significantly cooled off. By the time the renovations were finally complete and the property was ready to list, comparables in the neighborhood were selling for lower prices than 9 months prior. My overly optimistic estimate of resale value from when I first purchased did not match the new market reality. I learned I should have understood market cycles better to avoid overestimating what the fixed-up property would sell for after renovations were complete.

Lesson 3: Build In A Buffer for Unforeseen Expenses and market fluctuations

Between much higher than expected renovation costs and a cooling housing market, the ultimate sale price for the finished property did not yield the return I was hoping for. In fact, once total purchase price, renovations, holding costs and selling expenses were accounted for, I had lost money on the project. For my first investment property, I did not leave enough of a buffer in my projections for unforeseen renovation expenses and market fluctuations. I learned to be more conservative in my return estimates, leave room for surprise costs, and ensure sufficient profit buffer for shifts in market prices.

Key Takeaways When Buying an Investment Property for Renovation

  • Thoroughly crunch all numbers upfront for accurate purchase price and realistic renovation budget
  • Research market cycles to avoid overestimating resale value after renovations
  • Build in buffer for unforeseen expenses and market price fluctuations
  • Be conservative in projecting returns to allow profit buffer as protection

By applying this hard-won knowledge, I now carefully vet any potential flip projects to ensure the numbers work, the market timing aligns with the planned renovations, and sufficient profit margins are built in. This protects against ending up underwater again. Although the first investment property was a money-loser, the education gained makes me a savvier real estate investor moving forward.

Purchasing investment property can be a profitable endeavor but also carries risk if not thoroughly researched and strategically executed. Before tackling your own fix-and-flip or rental property project, consult with the expert team at Empire 8 Property. Their experienced advisors provide complimentary portfolio evaluations and risk analysis to help blueprint your goals, develop realistic budgets and projections, understand market conditions, and map out a plan to meet your investment objectives while minimizing risk. Don’t leave profit on the table or lose money due to lack of knowledge. Contact Empire 8 Property today to leverage their guidance developing and executing smart property investment plans.