How much should I rehab in a C neighborhood?

Question

Hi everybody!

(Question is at the bottom.. feel free to skip ahead.) :-)

I'm a first-time investor, and have tried to learn as much as I can before moving forward. It's amazing how many questions come up when you actually start to DO what you've been learning.

The neighborhood:

The neighborhood has 80%+ renters, but low crime. The best houses are "B", with the vast majority being in the C to C- range on the inside, and C+ to C on the outside.

The property:

I've found a C- property (with new, bad paint job, new cheap carpet and flooring) in a C neighborhood in a college town. It's a 4 bedroom, with the secondary bedrooms all really small. (9x9)

The house needs some obvious work to make it a C+ home... some plumbing issues, getting the dryer hookup out of the middle of the living room, adding a dishwasher, etc. Do I stop there? The house has old windows, not all of which will stay open. The counters are dated. The walls have horrible Artex texture. The HVAC is ancient, but works well right now.

I'm considering adding a closet in the second living area (9x11) to make a 4th small secondary bedroom, as our target market will probably be students on a budget. (I was there once... 5 BR means more people to split rent/utilities.)

The question: How much should I rehab?

Being in a C neighborhood, especially in a college town, I'm not sure how much value there is in bringing the house to a B. What do you think?

Thanks!

Mark Gallagher · Answer

@Tony Matthews

I would say "it depends" - do you want to attract the best tenants - if so it's time to renovate. Do you want to avoid large capital expenditures every year - if so it's time to renovate.

Not replacing windows, HVAC, etc. is just kicking the can down the road. Might as well pay today's prices, and avoid replacement for 15+ years than roll the dice for a few years and deal with it while it's occupied. No matter if you're renting for $500/mo or $5,000/mo people still have the same expectations. A nice, safe place to live.

Tony Matthews · Answer

Thanks everyone!

Basically, if it is capex that has to be done before I sell, I will go ahead and do it, like the HVAC and windows.

What about counters and doors? I would want to replace these before I sell, but they are in line with the neighborhood currently. How often do tenants tear up doors and laminate counters to the point where they need to be replaced?

(Is there maybe a thread somewhere I couldn't find that has some rules of thumb on what gets replaced between tenants that is not CapEx, like how often one might replacecounters, carpet, doors, and other things?)

Derrick W. · Answer

I asked myself the same question today. The money I spent for the rent I'm getting isn't that great but the equity is well worth the effort. At least it was on that particular house.

Bob Okenwa · Answer

@Katie Andrews

Read this article for a deeper understanding of grading. https://www.biggerpockets.com/renewsblog/2015/12/09/class-a-b-c-d-real-estate/.

@Tony Matthews

Look at what the competition is doing and try to mold your rehab as they did theirs. As @Igor Messano mentioned, you should visit/look at online nearby properties and see what they did in terms of aesthetic and functional design.

Chinmay J. · Answer

"A" grade areas are typically in safe and sound neighborhood with no to low violent crimes. Most of the houses in such neighborhoods are sold at a retail price, and you can get long term appreciation (provided property values continue to rising), but the cash flow could be terrible (if any). Most people would love to raise family here

"C" grade areas are place where you don't want to be walking around after sunset. If you are at traffic light, you want to roll up your windows. Cash flow in such areas is great but you may not get much in terms of appreciation. You buy these properties at discount. A lot of times these properties need fixing up like the OP has stated in his write up.

"B" areas.. Somewhere in between "A" and "C".

Hope that helps..

Igor Messano · Answer

I understand what you are going through as I question this most of the time I purchase my C+ properties. The best solution I've found was to take some tours of (virtual or in person) of properties in the area to get a feel for what properties are like. Once you start renting the unit, you will also get a better feeling from the tenants as certain things they wont even look twice at as they don't care but that comes after your first property.

As a side note, also consider any headaches you might have in the future with tenants if some of the things you don't repair break down such as HVAC or windows causing leaks. Sometimes it's better to take care of deferred maintenance when the unit is vacant.

Katie Andrews · Answer

As a brand new poster to this site, and someone who's new to the whole game, as well as someone who's also a teacher, I'd love to know how you "grade" these properties. Got an official rubric, or is it more of a judgment call? Thanks!

Katie

How much should I rehab in a C neighborhood?

How much should I rehab in a C neighborhood?

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