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Investing Strategies

How to Find the Rehabbing 'Sweet Spot' for Your City

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Hey Moguls, an awesome new Faculty Advisor is treating us today to a terrific lesson.

Chris Seder is an investor from Billings, Montana, who has grown his rehabbing business from doing just 1 deal a year to doing more than 10 deals a year – consistently. Chris did have a little help early on, which helped propel him to his successful REI career, his dad has been rehabbing and buying rentals since the early 1980s.

These days, Chris specializes in rehabbing and wholesaling and is a master of marketing and creating marketing systems. He also does 2 to 5 virtual wholesale deals a month, and he’s an author, speaker and real estate investing coach.

And that Mogul friends is why we’re pumped to welcome Chris – ‘cause we know we’re gonna get loads of good REI info from this dude. And with that…

From Chris Seder…

Hi Moguls, I’d like to pose a question:

“Does the location of your next rehab project really matter?”

Let me paint you a nice crisp picture of 2 rehab projects where both have the profit potential of around $30,000 but are in 2 completely different areas. To make the numbers easy to follow, I am not going to include closing cost, holding cost, Realtor commissions or all of the costs associated with buying and selling a house.  Just picture all of that included in the purchase price. 

Project 1 has a low purchase price of only $20,000 with repairs in the $15,000 range. The area has an average sales price of around $65,000 to $70,000 giving a rehabber the potential to make around $30,000 after all is said and done.  Sounds like a great deal, right? 

Project 2 has a purchase price of $100,000 with a repair cost of $30,000 and has an after repair value of $160,000 to $170,000 also giving a rehabber around a $30,000 profit spread.  This also sounds like a great deal, right?

Most beginning rehabbers think to themselves, ‘Man, why would I spend $130,000 to make $30,000 when I could go and buy a house, be in it $35,000 and still make the same amount of money? I could do that same deal 3 times with the same amount of money as just doing the one deal.’ 

But there is one small catch...

The one thing that I forgot to mention was that Project 1 is located in a lower-income area (not war zone), where 95% of the houses in that area are rentals. Project 2 is located in a working class/middle income neighborhood where 70% to 90% of the houses are owner occupied.   

After hearing these facts, which property would you choose as your next rehab? 

spotOf course, you know the phrase; “Location, Location, Location.” Well, it holds very true when it comes to rehabbing houses.  

Through years of trial and error (doing hundreds of rehabs), we have found what we consider our rehabbing sweet spot. For our rehabbing business, our easiest and most profitable deals have come in what I call first-time homebuyer areas.   

Our Sweet Spot

In our market, the first-time homebuyer areas have a mix of 2-to-4 bedroom houses, built in the 1950s to 1980s, between 1,200 sq. ft. and 2,000 sq. ft. and with after repair values between $130,000 and $200,000. 

This is our sweet spot. And, we have found that these areas have the MOST amount of deals for us to buy, and also – once fixed up – the houses sell faster than any other price range.

If we get in the too low amount of a price range, say in the $70,000 ARV range, we have found that because the areas are more rental areas, there are fewer people who want to buy there, and there are also less people who can actually qualify for a loan.   

Now, these areas are still amazing for wholesaling and buying rentals – for rehabbing, though, they’re just not great.  

The same thing applies to homes in our market that start to get more on the higher-end range. Once you start getting into higher-end homes, not only does your buyer pool shrink a little bit, but your end buyer expects more upgrades, which brings your rehab budget up.   

We have done a few higher-end type rehabs in our market and most of them have taken more time and money than we originally thought leaving us with more risk and an (only) average profit. 

How to Find Your City’s Sweet Spot!

Every city is going to be different when it comes to finding your sweet spot. If you're in markets in California, your sweet spot might be $300,000, $400,000 or more. Or if you’re in places like Detroit, it might be $100,000. Your goal now needs to be to go on a mission and find out where the sweet spot is. 

Follow these steps to do just that:

Step 1: Find your Retail Expert

sellTo start your search, I recommend you contact several Realtors in your area and start asking them questions about the real estate market. Say, “Hey, I’m considering buying a house, but I was really wondering if you knew some of the market statistics.”

You’ll want to know:

  • What are some of the more rental-type areas (so you can avoid rehabbing in these areas)?
  • What are some of the more first-time homebuyer area?
  • What is the average sales price in those areas?
  • What area has the most sales?

And any other question you can think of that might help you with finding your area.

I suggest you talk to at least 5 Realtors to get an accurate look at your market. Some Realtors are going to be bias so you do not want to take 1 person’s word – it’s best to get several opinions and come to your own general conclusion. 

Step 2: Using Robots to Find your Sweet Spot!

The next thing I like to do is go to Trulia and do some market research. Trulia will give you city crime statistics, prices and even demographic data. You can select ‘demographic data’ and select ‘owner occupied homes’ and it will give you the percentage of owner occupied homes compared to rentals in certain areas. This way, you can clearly see if the area you want to focus on is more of a rental area or more of a homeowner area. 

If an area is 85% rentals and 15% owner-occupied, it might be safe to say this would be a great wholesaling area, but not the best fix and flip area. 

Remember, I like to focus on the working class and middle-income neighborhoods. These areas have a good mixture of owner-occupied homes and rentals.  Typically more than 60% owner occupied.   

With Trulia, you can also search the average year of construction for homes. It will provide you with a heat map. This is very cool because for me, I know that most of the houses we fix up were built in the 1950s to 1980s. I can then avoid areas that are brand new and focus on older areas that have an abundance of homes that could be dated and in need up upgrading. 

Play around with Trulia and all of its statistics, get lost in the website and if you need help, I’m sure Google or YouTube have info on how to navigate the website. 

Step 3: How to Find your New Best Friend

The last step I use to find my sweet spot for rehabbing is to start networking with other rehabbers in the area. These people will know the better places to rehab and be a wealth of information for you. 

rehabTo find rehabbers, I suggest you start networking at your local REIA meeting, call up all of the ‘We Buy Houses’ ads and just start talking to everyone you know in order to find the biggest and best rehabbers in the game.  

I like to try and take these people out to lunch (make sure you buy), most people cannot say no to a free lunch, I know I can't. Explain to them that you are new and thinking about getting into rehabbing and you’re wondering if you could pick their brain. Ask them what types of homes they are buying, what areas, what prices ranges, profit spread, age of the home and anything else you can think of. 

Now You Are Ready to Start Finding Deals...

Finding your sweet spot when rehabbing is critical to your success. I have witnessed a lot of new rehabbers lose money because they tried to flip a house in an area where NO ONE was buying. This mistake cost them a lot of money, time and stress.  

It may take you some time to really figure out your sweet spot, but once you figure it out, you can truly start dominating your local real estate market. 

Lemme Hear Ya

Got any more questions about your REI sweet spot? Ask away in the comments section below.


Do It To It! Immediate Action Steps

Learn your real estate market by talking with real estate professionals in your area. 

Call at least 5 Realtors and ask them questions.

Use the internet and sites like Trulia to help you figure out the market statistics in your area and demographic data. 

Find out what other successful rehabbers are buying and where they are buying. The most successful rehabbers will know the market better than anyone else.

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