Prehabbing has been defined in some circles as the convergence between a rehab and a wholesale deal. A proper prehab, for that matter, combines elements from both of these prominent exit strategies. On the one hand, you are serving as the middleman between the seller and an end buyer (typically another investor). On the other, you are taking ownership of the home and making slight improvements. It is important to note, however, that while prehabbing evokes similarities of its more prominent counterparts, it is deserving of its own niche.
But if prehabbing is nothing more than an amalgamation of both wholesaling and rehabbing, why do many people consider it to be a viable exit strategy in and of itself? Why not choose the more popular options? Truth be told, there is both a time and a place to prehab a deal. Below you will find four of the most common reasons people choose to prehab properties:
1. Your Cash Reserves & Leverage Are Limited
With more than a decade of real estate investing experience under my belt, one truth has made itself more apparent than perhaps any other: the types of deals you will be able to pursue are contingent on the funds you are able to procure. In other words, the deals you decide to look into are entirely dependent on whether or not you can afford them.
That said, there are essentially tiers for every type of deal; each individual exit strategy has become synonymous with a distinct cost. Rehabs are, for the most part, the most expensive exit strategy. Wholesale deals, on the other hand, don’t even require you to put any skin in the game at all in some circumstances. Prehabbing, however, finds itself somewhere in the middle. While you will need to pony up enough money to purchase the property, you don’t have to worry about the extra capital needed restore a property as you would with a full rehab.
Remember, as a prehabber, you are not expected to make significant changes to a property, but rather commit to just enough work to make the property attractive for another investor. Consequently, your involvement is minimal, and therefore requires less capital to complete. In fact, I highly recommend abstaining from infusing anymore capital than is absolutely necessary.
So if your current cash reserves are incapable of sustaining a rehab for the next three months, I recommend you consider a prehab. It will require much less capital, but will net you more returns than a traditional wholesale. Of course, run the numbers to make sure that a prehab is the right move for your current situation, but understand that it is a viable exit strategy for anyone who can’t quite afford a rehab at the moment.
2. You Have A Hard Time Finding Buyers
Regardless of how much experience you have in the industry, every property you sell is dependent on the cooperation of another party. There is no way around it; you will have a hard time making money on the back end of a prehab deal if you can’t find an end buyer. However, unlike a traditional rehab, the end buyer in a prehab deal is most likely another investor; someone with a grasp of how the process should transpire. Not only that, but if you have done your due diligence, you should be sitting on an investment property others will want. There is no reason to believe they won’t already have a campaign in the works marketing for a deal just like yours. After all, isn’t that the point of a real estate prehab? That means there is a good chance investors will seek you out without even marketing your property.
If you have had a hard time selling a property in the past, you may have been the victim of bad luck or a poor marketing scheme. And while there is always the risk of the same thing happening to a prehabber, the chances are much lower. If for nothing else, your pool of potential buyers will be larger; both investors and homeowners looking for a good deal will view your property as a potential candidate.
3. You Have Another Deal In The Works
When you first start out as an investor, access to capital can certainly limit the amount of deals you close on. Even when you are using other people’s money, it can sometimes be difficult to fund more than one deal at a time. That means you must become more selective with the deals you actually choose to pursue. The last thing you want to have to do is pass on a great deal because all of your money is currently invested in another property.
Fortunately, prehabs award investors the opportunity to get in and out of a property with minimal time invested. That way you can complete more deals in a given year, and still give your self some room to take on larger rehab deals in the future. So if you are aware of a deal that is coming up, but currently have a home on the books, consider prehabbing the one you are currently working on and freeing up capital for the one you are expecting in the future. That way you don’t have to pass on either deal when they present themselves to you.
In short, prehabs award you the ability to get in an out of a property in a relatively short period of time, but offer slightly higher returns than a traditional wholesale. At the same time, you won’t have to worry about your money being tied up too long and having to miss out on future opportunities.
4. You Are A Risk Averse Investor
There is an inherent degree of risk associated with any type of investment property. However, it is entirely possible to mitigate said risk, and even limit your exposure to situations you are uncomfortable with. First and foremost, a proper education can more than place the odds in your favor. With the right systems in place, it is possible to navigate risk and exponentially increase your likelihood of success. However, the exit strategy you choose will certainly introduce you to a predetermined degree of risk. Subsequently, some methods of investing are more risk averse than others.
It just so happens that prehabbing coincides with less risk than a traditional rehab. If for nothing else, the simple fact that a prehab doesn’t involve rehab costs suggests it is more risk averse, and therefore more suitable for those who are less inclined to make risky decisions.
Over the course of a prehab, short as it may be, there is never any reason to worry whether or not improvements will be made for the right reasons. Subsequently, rehabs run the risk of either over-improving properties, or even under-improving them. The smallest miscalculation can cost you both time and money. Prehabs, on the other hand, are void of those decisions altogether.