Investment Property Makeover: A Budget-Friendly Rehab Blueprint: One of the pricier projects a real estate investor can undertake is rehabbing investment properties. This undertaking can be overwhelming and tricky, especially for beginner investors. It consists of purchasing a property, renovating it, and selling it for full market value or renting it out. Rehabbing requires attention to detail and time to master. It remains one of the more lucrative investment options in real estate. That’s why investors flock to this type of investment.
☛ Step One: Make an Offer:
The first step is to make an offer. This stage requires you to run the numbers on a deal to evaluate exactly what type of offer you can introduce to the seller. It is the foundation of a good deal. It is the secret sauce. Here are 3 tips on making a good property choice once you have done the research on your target market:
Understanding the 70% Rule: The 70% rule is a common guideline in the fix and flip strategy. It suggests that an investor should pay no more than 70% of the after repair value (ARV) of a property, minus the cost of repairs needed. This rule is designed to help investors ensure a profit margin while accounting for unexpected costs and market fluctuations.
Estimating Repair Costs Accurately: To apply the 70% rule effectively, you need to have a good understanding of what it will cost to renovate the property. This includes everything from minor repairs to major overhauls. It’s often recommended to get estimates from contractors or a home inspector to ensure accuracy. Underestimating the repair costs can significantly affect your return on investment.
Evaluating After Repair Value (ARV): The ARV is an estimate of what the property will be worth once all repairs and renovations have been completed. To determine the ARV, you’ll need to look at comparable properties in the same area that have sold recently. This will give you a realistic idea of what you can expect to sell the property for once it’s ready to go back on the market. Remember, the ARV is a critical component in the 70% rule calculation.
☛ 3 Tips on Making a Good Win Win Offer
Remember, a win-win offer is about creating a deal that benefits both you and the seller. By understanding the seller’s needs, offering flexible terms, and showing that you are a serious buyer, you can increase your chances of making a successful offer.
Understand the Seller’s Needs: Every seller has unique needs and motivations. Some may need a quick sale due to a job relocation or financial hardship, while others may be more focused on getting the highest price. Understanding the seller’s needs can help you tailor your offer in a way that is appealing to them, increasing the chances of your offer being accepted.
Flexible Terms: Sometimes, the terms of the deal can be just as important as the price. Offering flexible terms, such as a quick closing date or a leaseback period to allow the seller more time to move, can make your offer more attractive. If you’re able to accommodate the seller’s needs in terms of the transaction timeline, it can create a win-win situation.
Pre-Approval Letter: A pre-approval letter from a lender shows that you are a serious buyer and have the financial capability to follow through on your offer. This can give the seller confidence in your offer and may make them more likely to accept it, even if it’s not the highest one they receive.
Pro Tip: When doing your walkthrough of the property the seller or realtor may try to chat during your inspection.
- At times they may try to talk to distract you from noticing obvious property defects.
- Remember you are there to carry out a job, so make sure you are laser-focused.
- Later that distraction can cost you $5000-$10,000! Excuse yourself and walk away from them and make sure to revisit the area that triggered the interruption.
- Also, take lots of pictures, notes and even videos to avoid a second trip.
Remember time is not your friend so make good use of it.
☛ Rehab Cost
Rehab can cost anywhere from $20,000 to $75,000 or more. It’s your task to find a rehab project within your budget and skill set.
- As a rule of thumb, it is a good idea to start by assessing how much capital you have available.
- Especially, if you are borrowing funds for the purchase and rehab.
- Lenders expect that you have a bit of skin in the game. So expect to put in a deposit or have cash to play.
- Once you know what your cash situation looks like, you can narrow down the size of the property and rehab project you can handle.
Here’s what the cost breakdown may look like on a few rehab examples. (Note: These are national averages and may vary depending on where your market is located.)
- Rehab Level 1: At times a project may need light work completed.
- Any investor can expect to pay about $10,000 to $20,000 for light remodels that include interior painting and spot refinishing, etc.
- Rehab Level 2: An investor can expect to pay about $25,000 to $45,000 for smaller remodels.
- That includes painting both the inside and outside of a home, light refinishing cabinets, and updating the landscaping.
- Rehab Level 3: A heavier rehab, that includes all level 1 and 2.
- Add a complete kitchen renovation and a small bathroom fixup. The cost could be between $46,000 and $75,000.
- Rehab Level 4: This is a major upgrade.
- It includes the cost of gutting a house and remodeling.
- This includes everything listed in level 1-3, plus structural issues, foundational and roofing. This will likely cost $76,000 or more.
- Keep in mind, that every level of rehab it may differ especially if you fine more defects during the course of the rehab.
If you are new to rehabbing, we suggest you start with level 1-2 rehabs. Build up to the other levels when you get some experience under your belt.
- Remember the more hands-on you are the better prepared you will be moving up the line for your next few projects.
- It’s crucial to add up all the costs of potential renovations before you put a down payment on a property.
- Don’t let the dreamy idea of owning a rental property suck you in.
- Instead, be brutally honest before you commit. Doing so may actually pay off in the long run and save you from making a mistake.
“If people are unforgiving upfront about assessing the costs of renovation, the value of the property and the neighborhood, and how much money they have, they can come out ahead and buy more house than they otherwise could ever afford,” Bradley Inman, CEO of HomeGain.com, told This Old House.
☛ Common Fixer Upper Project Considerations:
☛ Most Common Rehab Projects
- Bathroom Renovation: The average bathroom restoration ranges from $6,000 to $14,000, according to HomeAdvisor.
- The biggest cost in the room are cabinets.
- Next is the bathtub itself which per HomeAdvisor could cost between $400 and $1,500 for a basic tub.
- If you’re looking to go high-end, that tub could set you back a cool $8,000-$10,000.
- For rental properties, you can find a one-piece shower and tub fibreglass set that is easy to install, nice looking and cost about $800.
- Remember the repair item choices are dictated by your exit strategy
- For rentals – builders grade
- For selling- depends on how much you want to make profit. The more bells and whistles the better the payoff. Caution… don’t overspend.
Kitchen Remodels: According to HomeAdvisor’s 2019 remodel estimates, the average cost of kitchen remodels is $20,474. The National Kitchen and Bath Association estimates the top expenses for an average kitchen remodel include:
- Cabinetry/hardware (29%),
- Installation (17%),
- Appliances (14%),
- Countertops (10%),
- Flooring (7%).
You could always save by purchasing stock cabinets from a place like Lowes or Home Depot. In most cases, it may only run a few hundred dollars per cabinet. You may also want to look at damaged cabinets that can be salvaged if you know how to make slight modifications.
- Roof Installation: A roof should typically last two to three decades on a home—or longer in some cases. The average cost for replacing a roof is roughly $6,838 – $10,000.
- But, again, that cost can vary depending on if you want to go budget-friendly or superior quality.
- For instance, asphalt shingles, which are the most common roofing type, could cost as little as $1,700 for a standard size roof.
- Now a slate, which could last even longer without needing repair, may run up to $120,000.
💎Pro Tip: try surplus and liquidation clearance building supply warehouses.
- At times, you may find used cabinets sets for under $1500.
- If you are planning to do a few rehabs in the next 12 months, it’s wise to visit these surplus warehouses. So, you can stock up on cabinets and other used building materials.
- It is a good way to save moving forward.
☛ How Long Does It Take to Rehab an Investment Property?
It can take anywhere from six weeks to six months to rehab an investment property.
- There are several factors you can use to determine how long a project will take.
- That includes the size of the property, the extent of work, and how many team laborers.
- To get a more concrete understanding of a rehab project, look at each of these factors before purchasing a given property.
- Additionally, make sure you are on the same page with the contractor.
- Make sure he can give you a good time estimate.
- Using a “Scope of Work” report itemizes all the tasks to complete the rehab, but it also provides a complete time schedule.
- Download the report below so you can use it on your next project.
Click Here for Your Our Property Rehab Checklist and “Scope of Work” Report
☛ Contractor Report Card:
Here are a few items to consider when looking for a contractor:
- References: Get at least three references from past clients.
- Project Scheduling: Do they have time in their schedule to perform the necessary duties?
- Does their schedule matches with your timeline?
- Licensed and insured: Be sure they have the qualification and certificates to perform the duties they are being hired to complete.
- You can use a handyman for small tasks, but the big items on the list should be completed by a licensed and insured professional.
- Also, check to see if a contractors license is current.
- Payment Schedule: Determine if the proposed payment schedule aligns with your funding procedures.
- If you are borrowing funds, the lender determines how many draws.
- They also provide the schedule using the “Scope of Work” report as a template.
- Any experienced investor friendly contractor will know how this works.
- Work Ethic: Being on time for the job and completing tasks on schedule is the best gauge for vetting out a contractor if you choose to work with them again.
- Are they dependable? Are they trustworthy? Are they reputable?
- All questions that are determined during the life of the project.
Once you’ve found several contractors, the next step is to have each one submit a formal project bid. This will enable you to handpick the contractor that best fits your needs and budget.
Pro Tip: Never…ever…ever give all your rehab funds to the contractor.
- We had an investor that gave $75,000 cash to an unvetted unlicensed contractor.
- They dropped off some materials at the site and were never seen again.
- Even if you are paying with your own cash, you should always use the draw method of dispersing cash.
- Every time the contractor completes one phase, you need to sign off on it, so they can move to the next phase.
- Always use a bank check, check or pay by card. NEVER CASH!!
- Most professional contractors follow this system.
☛ 10 Rehab Steps to Follow
Follow these steps on how to rehab an investment property:
Pro Tip: Green and energy-efficient systems are in favor and will impact your investment returns.
- Buyers will sometimes pay extra for a property with a low carbon footprint and energy-efficient systems.
- Items like solar power, water reclamation system for watering the grass and other creative ways to conserve and reuse resources is a clever way to make an old house into a progressive one.
☛ 7 Property Rehab Tips for Newbies:
Rehabbing your first investment is no easy feat. You will feel like your are drowning sometimes, but that is normal. Just keep moving towards the finishing line. The following helpful tips are for your very first project:
☛ Rehabbing an Investment Property: 5 Mistakes to Avoid
As you gain understanding, you will become more secure with the methods of rehabbing investment property. However, that may not make your first rehab any less terrifying. Read through these closing mistakes to avoid before embarking on your first investment property rehab:
Ignoring the Market & Sale Price: Failing to understand the local real estate market can lead to poor investment decisions. It’s crucial to know what features and improvements are most valued by buyers in your specific market.
- Just because a market is well suited for one exit strategy does not mean it will work for another strategy.
- Make sure the property is located in an attractive area and consider what amenities you could highlight in the future when selling the property.
- If the property is in an unfavorable location, focus on adding value to the property (washer, dryer, new AC, parking spot, etc.
- We converted a small 20-unit hotel into studio apartments. We had a common area, and a gym and added a laundry room.
- Normally in a residential area a property like that would not fly, but this particular project was by two colleges.
- It was a perfect fit for the local college students attending school.
- Great thing is that we offered discounts to parents if they paid for the year and about 8 of the units paid for the full year.
- We packaged this property and sold it to an investor that had a niche college student housing business across the east coast. He was happy to buy it from us. We sold him 3 additional similar properties since.
Look out for a market with potential, and don’t be afraid to branch out of your local area once you gain experience. Another factor is the price of the property. This goes hand in hand with knowing your market.
Sale Price: Choosing the wrong sale price is what you need to avoid.
- No matter how exceptional a property is, it must be priced to sell.
- If it’s priced too high, it will sit on the market and increase your holding costs every month, undercutting the deal’s potential profits.
- Take comparable home prices into account before planning the renovations and purchasing the home.
- Keep the 70% rule in mind at all times. It will save you from trouble.
Get Insurance: Property insurance is critical to the success of any project.
- In case anything unforeseen occurs, insurance can help protect both you, your personal assets and your investment.
- Always make sure you are covered. This is crucial, especially as workers start working on renovations.
- If you are working with your own cash resources, you may not think about it but make sure you do because you will pay dearly if you don’t.
- As a private lender this is one of the requirements for any properties we fund. It keeps us all protected.
Underestimating Costs: One of the most common mistakes new investors make is underestimating the cost of renovations. This can include both the cost of materials and labor. It’s important to get accurate estimates and budget for unexpected expenses.
Over-improving the Property: While it’s important to make the property appealing to potential buyers, over-improving or adding high-end finishes that are not in line with other homes in the neighborhood can make it difficult to recoup your investment.
Poor Time Management: Renovations often take longer than expected.
- Delays can be costly, especially if you’re paying a mortgage on the property.
- It’s important to have a realistic timeline and to manage your rehab project efficiently to avoid unnecessary holding costs.
☛ Final Thoughts
In conclusion, rehabbing investment properties on a budget is not only possible, but it can also be highly profitable with the right approach. The key is to prioritize, plan meticulously, and make smart, cost-effective decisions that add real value to the property. Remember, it’s not about how much money you pour into the project, but rather how wisely you use your resources to create a desirable property that attracts buyers or renters. With the strategies outlined in this guide, you’re well on your way to mastering the art of budget-friendly rehab. So, roll up your sleeves and let the transformation begin!
