In any economic climate, there are always distressed properties that can be acquired at a discounted rate with the intent to resell them at profit or rent them for a substnaital capitalization rate. One of the best aspects to owning and operating a property rehabilitation firm is that these businesses can easily obtain debt financing in order to acquire the property and leverage the return-on-investment. For properties in wealthy areas and other high economically viable markets, there are always investors that are willing to provide capital for these projects as well.
Strengths
For individuals that are highly trained in the fields of construction, contracting, and design – property rehabilitation can be a highly lucrative enterprise. The properties that are generally acquired for these purposes are usually 30% to 50% under their market rate value given the substantial work that must be done to the property. The returns-on-investment for each dollar of improvements made are substantial. This is especially true for multi-unit properties.
As discussed throughout this website, real estate focused companies enjoy substantial access to capital given that banks love when tangible property is the underlying collateral. It should be noted that many property rehabilitation firms often acquire lines of credit that are secured by properties that are purchased outright at the time of closing.
Weaknesses
As with any major property rehabilitation, there are going to be problems throughout the course of the project. Contactor issues, permit issues, and unexpected issues with the property are all stock-and-trade for this industry. As such, it is imperative that the entrepreneur that is starting this business have a complete understanding of proper construction methods.
One of the other issues that a property rehabber can face is that market conditions can quickly change during the course of a large scale renovation. As such, a substantial amount of capital is generally kept on hand in order to manage carrying cost and unexpected delays between the time of completion and sale (or rental).
Opportunities
Given that many major areas often have hundreds (if not thousands) or properties that are in need to rehabilitation, the opportunities for a property rehabber are endless. In many areas there are specialized tax incentives for developers/rehabbers that are able to improve properties.
As discussed above, access to capital is usually a straightforward process for many businesses in this field as real estate acts as the collateral. Additionally, substantial equity is quickly generated at the end of each project. In the event that a property is slow to sell, a long-term mortgage can be acquired in order to refinance the debt that was used to carry out the acquisition and rehabilitation.
It should be noted that a successful track record is developed; many property rehabilitation firms will use syndication methods (sourcing capital from a number of real estate investors) in order to take on larger projects (including multi-unit properties).
Threats
The biggest threat among property rehabilitation firms is the ongoing and rapidly changing economy. However, residential real estate is always in demand (especially in markets that need affordable housing).
Competitive issues are more of a minor threat for this type of business. It is imperative that a property rehabilitation firm produce high quality homes that are affordable (either via sale or through rent).