The housing market continues at its five-alarm fire pace, offering both opportunities and risks to aspiring homeowners and investors. For those in the know on how to Buy a House for the Price of a Car, real estate can be a lucrative strategy indeed; but it doesn’t always come easy. If you’ve made the leap and purchased your first investment property, congratulations! After you’ve poured yourself a glass of bubbly, buckle up, because this is where the real work begins!
As a seasoned Real Estate Investment Coach and Successful Investor, we at My Smart Cousin take seriously our responsibility to help our clients, particularly Black and Brown folks, increase their generational wealth and influence. Now more than ever, there is an opportunity to make money in the real estate game through rehabbing homes. Scoring a great deal on your investment property is an important first step, but it’s not the only one. Before you jump in head first, it’s important to understand the fundamentals of rehabbing, so that you can renovate your property quickly and cost-effectively and get it on the market. In this article, we’ll outline the five key elements to rehab a property like a pro. So, if you’re thinking about getting into the rehab business, read on for some helpful tips!
WHAT EXACTLY IS A REHAB?
Rehabs come in many flavors. Some properties require nothing more than a coat of paint, while others require a full-on makeover, from a new bathroom and kitchen to flooring, appliances, and fixtures. What distinguishes a rehab from a full gut job is that rehabs usually involve improvements to superficial items like drywall, tile, and carpets while gut jobs veer into the world of construction, requiring permits for electrical, plumbing, roofing, and HVAC work. In either case, whether you’re donning a hard hat or just a pair of overalls, rehabbing a property is rarely easy. A successful rehab requires patience, skill, and planning. Once armed with these resources, an investor can look to earn back not just their original investment, but also a return on their investment.
YOUR REHAB ROADMAP
1. DETERMINE YOUR INVESTMENT HORIZON
One of the first questions a successful rehabber must answer is, what is their investment horizon. That is, will the property in question be renovated and then rented or leased out— a buy and hold? Or is the goal to renovate and immediately list the property for sale— a so-called buy and flip? Your objective for the property as either a buy and hold or a buy and flip can affect how quickly the rehab needs to be finished, as well as at what cost.
Assess the Real Estate Market Fundamentals
In determining whether your rehab will lead to an immediate rental or sale, let the local real estate market and market fundamentals be your guide. If rental rates are on the rise and the neighborhood is chock-full of long-term and short-term rental properties, then a rehab-to-rent approach may be in the cards. On the other hand, if every second or third house is holding an open house, with houses snapped up after only days on the market, then a rehab-to-flip approach might make more sense. My Smart Cousin can help you do a market analysis to determine whether a rental or flip makes more sense as well as what the potential costs and returns of each path look like.
2. ASSESS THE CONDITION OF YOUR PROPERTY AND MAKE A PLAN
Before purchasing your property, it’s important to assess the home closely and determine whether there are any major issues requiring repairs or outright replacement of totems such as the wiring, HVAC (heating, ventilation, and air condition), or sewage systems, as these can be expensive and time-consuming to remedy. When doing your walkthrough with your handyman or contractor, bring a camera or use your cell phone and take both pictures and video. When taking video, narrate as you go with comments on what room you’re in (for instance, ‘bedroom next to the bathroom’), the issue you see (for instance, ‘evidence of water leak in master bedroom ceiling’), and the steps to take (for instance, ‘have handyman or roofer take pictures of the roof to determine its age and condition).
3. FLESH OUT YOUR REHAB BUDGET AND WHAT YOU HOPE TO ACHIEVE WITH THE PROPERTY
An important part of renovating your home is knowing what needs to be done. This will help you stay within budget and avoid expenses that don’t deliver a return on your investment.
You can assess whether a particular expense will yield a return by calculating the after-repair value (ARV) of your property. The ARV value is the new and improved value of your property after taking into account the cost of the work you’ve done as compared to the market price for similar homes. As an example, if you purchase a house for the Price of a car, let’s say at $40,000, and renovate it for $30,000, with the high-ticket items being new appliances, kitchen cabinets, and upgraded fixtures and lighting throughout the home, then your effective property cost is $70,000. But $70,000 isn’t the ARV value; the ARV value is the market value of houses that are in the same condition as your newly-renovated property. If average properties in the neighborhood are selling for $100,000 but come with upgraded appliances and fixtures that are move-in ready (like your home) are selling for $115,000, then the ARV of your home is $115,000. Knowing the determinants of market value and the price of these homes is key to determining a renovation budget, both in terms of how large it should be and what gets you the best bang for your dollar
4. CREATE A WORK PLAN FOR THE PERSON WHO WILL BE DOING THE WORK, WHETHER THAT PERSON IS YOU OR A CONTRACTOR CREW
Hiring a contractor is often the most daunting part of any home renovation. But doing the work yourself is also no walk in the park. To reduce both the headache and cost of any re-work, develop a plan for the work that needs to be done.
If you are hiring a contractor, then the work plan should focus on getting multiple estimates, checking references, confirming that the contractor is licensed and insured, negotiating a strong contract that makes payments to the contractor based on the speed, quality, and completion of the project within the agreed budget, and ensuring that liens are removed once the work is completed.
Fortunately, there are many ways and platforms available to find a contractor for your project. The Key is selecting an insured and qualified professional, particularly if this is your first property. A verified professional offers a higher likelihood that the work will run smoothly from start to finish.
If you’re doing the work yourself, then the plan comprises creating a detailed listing of what needs to be done, and in what order. For instance, while shopping for lighting and appliances might be fun, that work comes after completing any plumbing or wiring work.
When doing the work yourself, pay particular attention to any permits or other regulatory requirements that must be met. Licensing officials take particular interest when they see a dumpster parked in front of a property for several days (also note, dumpsters being parked on a city street often require a permit). So be prepared to follow the same level of professionalism that you would expect from a contractor.
5. BE PREPARED TO NEGOTIATE A FAIR PRICE
Now that you’ve worked hard to renovate your house, it’s time for the payoff. Begin with educating yourself on what the market comparables are, that is, the sales price of properties similar to yours as well as the sold price. Evaluating this at the front end will help ensure that you offer a realistic ‘Goldilocks’ price that’s neither too high nor too low, but just right.
Using staging along with thoroughly cleaning the home, both for rental and for-sale properties can increase the price you receive as well as shorten how long the property is on the market, as staging helps buyers and renters picture themselves living in the property and seeing how their current furniture or dream furniture will fit. Lastly, good customer service skills, with phone calls and emails to potential customers after they’ve toured the home, will help get you to the finish line faster. THE BOTTOM LINESo, if you’re feeling inspired to take on a rehab project of your own, make sure you follow the above roadmap. While it can be a lot of work, it’s definitely worth it in the end when you see the RENTED or SOLD sign go up.
RECOMMENDED READ: SHOULD YOU HIRE A REAL ESTATE CONTRACTOR? IMPORTANT TIPS FOR HOUSE FLIPPERS
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