Attorney · Cherry Hill, NJ · Member since 2017 · 62 posts · 21 votes
Hello everyone,
I am starting to analyze some deals in my local area as I am looking to purchase my first property. I am generally looking at 3BR, 2BA properties and some smaller multifamily properties. A few questions keep entering my mind when I crunch the numbers. How much should I budget for rehab costs? Also, what are some of the items that you regularly choose to rehab for rentals, such as painting, flooring, counters, cabinets, appliances etc. (other than capital expenditures).
I have noticed that a few listings in my area will state a dollar amount that is needed to get the property "rent ready" (e.g. $25k). Do you find those type of statements to be accurate or do they often entail more work than is actually needed?
I understand that the numbers will vary based on the location and the condition of the property. I am curious as to what everyone's general approach is in their markets and what works for you.
Realtor and Investor · Scottsdale, AZ · Member since 2017 · 1k+ posts · 1k+ votes
8y
Only YOU can determine what it is going to take to get it rent ready. You can use those statements as a guide, but not in place of doing your own due diligence.
It is hard to speak in general terms. It really depends on the property. I have walked properties where $3K sufficed. Then, I have walked properties that I knew would be a total gut and allocated $20K. So, you have to walk the property and create a budget based on your end goal. So, what is your end goal...Tenant ready? Then put your Tenant hat on and walk through the property and ask yourself what would need to change in order for YOU to live there. If you like the kitchen cabinets, then there is no reason to change them. If the paint is newer, then leave it. If the carpet is clean and neutral, leave it (even if you want to tile, save that for the next turnover. Never pull up perfectly good condition carpet).
Then prioritize. Do the things that NEED to be done first. Save other items that are OK for now (like the carpet mentioned above) for the next turnover. That way you can break up some of your capex.
Above ALL else, make sure the unit is CLEAN! Clean units rent right away, even if they aren't the most upgraded. Remember, this is going to be someone's home. No on wants to move into a dump.
Realtor and Investor · Scottsdale, AZ · Member since 2017 · 1k+ posts · 1k+ votes
8y
Only YOU can determine what it is going to take to get it rent ready. You can use those statements as a guide, but not in place of doing your own due diligence.
It is hard to speak in general terms. It really depends on the property. I have walked properties where $3K sufficed. Then, I have walked properties that I knew would be a total gut and allocated $20K. So, you have to walk the property and create a budget based on your end goal. So, what is your end goal...Tenant ready? Then put your Tenant hat on and walk through the property and ask yourself what would need to change in order for YOU to live there. If you like the kitchen cabinets, then there is no reason to change them. If the paint is newer, then leave it. If the carpet is clean and neutral, leave it (even if you want to tile, save that for the next turnover. Never pull up perfectly good condition carpet).
Then prioritize. Do the things that NEED to be done first. Save other items that are OK for now (like the carpet mentioned above) for the next turnover. That way you can break up some of your capex.
Above ALL else, make sure the unit is CLEAN! Clean units rent right away, even if they aren't the most upgraded. Remember, this is going to be someone's home. No on wants to move into a dump.
Attorney · Cherry Hill, NJ · Member since 2017 · 62 posts · 21 votes
8y
@Cara Lonsdale This is all extremely helpful. Only updating what NEEDS to be updated really and thinking like a potential tenant resonated with me. Even if you want to make your units abuse-proof, why do so at the expense of a carpet that will last for a few years, or a recently painted room that may not be the color you would have selected but is perfectly fine for a tenant to live in? That is an excellent mindset and approach to ultimately lower expenses and increase cash flow. I have two follow-up questions:
1) Do you recommend that a new investor (with very limited knowledge of rehab costs) walk through a SFR with a contractor to get a sense of what the overall cost for certain repairs would be?
2) Just to play devil's advocate, what if you choose not to alter recently updated items (e.g. carpet) and rehab/modernize other things (e.g. cabinets) that definitely need to be done? Some of those choices might conflict with your overall idea to modernize the property, make it pleasing to the eye, and attract tenants. In other words, can this approach make the unit look like a mix of old and new (outdated paint color or carpet that clash with new, modern counters or cabinets)? Is that something that you should be willing to live with for a couple of years to take advantage of the cost savings you referenced? Then, you can slowly but surely update the entire property to fit your vision as each item needs to be replaced.
Pomona, NY · Member since 2016 · 375 posts · 217 votes
8y
Always do a walk through with a general contractor if repairs are needed, I would walk it first on your own get a feel of the condition, then bring the gc, if it's your first run, I'd show to a few so you know who's ripping you off and who's being honest
You have to be cognizant of the immediate area in terms of Class and what the finishes should be installed.
So, is it a Class A area that requires stainless steel appliances and granite (or even quartz) CT? Or is a C+ Class area where putting vinyl flooring will do the trick?
Consequently, the type of delivered product is extremely important in terms of estimating rehab costs.
To conclude, we always allocate 10% as extra capital for surprises.
@Cara Lonsdale This is all extremely helpful. Only updating what NEEDS to be updated really and thinking like a potential tenant resonated with me. Even if you want to make your units abuse-proof, why do so at the expense of a carpet that will last for a few years, or a recently painted room that may not be the color you would have selected but is perfectly fine for a tenant to live in? That is an excellent mindset and approach to ultimately lower expenses and increase cash flow. I have two follow-up questions:
1) Do you recommend that a new investor (with very limited knowledge of rehab costs) walk through a SFR with a contractor to get a sense of what the overall cost for certain repairs would be?
2) Just to play devil's advocate, what if you choose not to alter recently updated items (e.g. carpet) and rehab/modernize other things (e.g. cabinets) that definitely need to be done? Some of those choices might conflict with your overall idea to modernize the property, make it pleasing to the eye, and attract tenants. In other words, can this approach make the unit look like a mix of old and new (outdated paint color or carpet that clash with new, modern counters or cabinets)? Is that something that you should be willing to live with for a couple of years to take advantage of the cost savings you referenced? Then, you can slowly but surely update the entire property to fit your vision as each item needs to be replaced.
Thanks again.
In the beginning, it may be a good idea to walk a property with a contractor to get an idea of pricing. After a few of these, you will be able to eyeball it yourself for most stuff. Start building your construction team as you go. When you meet a good plumber, take their card and call them for the next issue. When you meet a good electrician...and so on. I once pulled over to get a painter's number while I was looking at property in a neighborhood and saw him painting the exterior of a different house on the block. I could see his work in front of me, so I knew what he was capable of. People on here like to bash home warranties, but I have connected with some really good workers that way too. I have a garage door guy that is the best, and will do his best to fix what he can, and prepare me for expenses coming down the pike so I can plan and budget for them (he once braced a garage door that was cracking to give me another couple of years out of it before the section broke and needed replacement).
Whatever you do, always create a budget. Start by creating a spreadsheet that goes through each room, and lists all of those items you want to fix/replace based either on the need, or the shelf life (carpets every 4 years, etc). Place a priority by them (immediate/3 mos/6 mos/year 1/year 2...you get the idea), come up with an expense. Tally it up. Add a contingency (at least 10%). This will be a working budget because it will continue for the life of the property, and it allows you to build a capex expense when you are figuring your cash flow for the property.
To speak to your 2nd question, I want to be clear that I am not suggesting that you compromise your replacement tastes, but rather that you know when to apply them. I'll use a real example. One of my investors just purchased a 3/2 to hold as a rental. It has fresh paint (but it is stark white throughout), and new carpet everywhere except kitchen and baths (Investor does tile throughout normally), and appears to have original fixtures, appliances and just screams drab.
What the Investor WANTS to do: New cabinets, new counters, tile floors throughout, new fans and fixtures, new appliances, fresh paint in gray, new landscaping.
What we are GOING to do immediately: In order to maximize what HAS been done, we are going to leave the carpet for the first Tenant (it's brand new and looks great). We are going to replace the apliances with stainless. We are going to paint some walls to give it a more modern feel, and to take away from the stark white. We are going to replace the ceiling fan and light fixtures, and spruce up the backyard landscaping.
Once the 1st Tenant is out and it makes sense to pull the carpet, it then would be a good time to replace the cabinets (since the floors are coming up). So cabinets, countertops and floors can be done then. Painting more of the white away could also be done each turnover. And so on. You get the idea.
Of course, you want to maximize your potential rental rate, but always quantify that to see if it makes sense. In other words, will pulling up brand new carpet to replace it with tile get you more in rent to make it worth doing it NOW? In the expample above, the answer is no. Now, after a Tenant or 2 being hard on the carpet, the answer would be YES. Is that modern bath vanity and light fixture NOW going to fetch you more than just doing the light fixture now and adding the vanity at the next Tenant turnover (and still offer a little modern flare to this tenant). Does that make sense?
Attorney · Cherry Hill, NJ · Member since 2017 · 62 posts · 21 votes
8y
@Michael Gessner Great tips. When you start looking at multiple deals and you settle on a GC, is it normal to pay the GC a flat fee for their time to estimate repairs at each property? Or, once you start doing a few deals with that particular GC, is the GC willing to provide this service free of charge, knowing that you will hire the GC for for the next job and possibly additional projects?
@Ola Dantis Yes, that is great insight and very helpful. I have heard similar advice mentioned on the BP podcast a few times, so when I am ready to invest and find my first deal, I will definitely be aware of those details.
@Cara Lonsdale That is incredible advice. The real life example really helps put the situation into context. As you said, it really depends on the property and its condition. I will keep your budgeting advice when I start to look for my first deal. Thanks again.
Realtor · Grand Rapids, MI · Member since 2016 · 174 posts · 122 votes
8y
@Ian Livaich Only you should do those numbers or somebody you trust. I would find a realtor/property management/contractor with investment experience to do that for you or spend the time to know what everything costs. This would depend on your time costs. When we started out investing it made more sense for us to learn it all ourselves but if we started investing today, we would surely just pay for the knowledge because what we make hourly now would not have been worth the time spent. For investors regardless of where they come from out of state or in state we give them the breakdown of the repairs versus return. So they know that they are getting. So for example, we may say $4500 on a new kitchen to get $100 more in rent a month but rent ready is very subjective. You should know this too. Also, if the realtor listing the deal is an investor their contractor prices may be lower than what you can get due to economies of scale. We charge our investors that we find homes from that are out of state a 10% project management fee that we have considered raising because between our wholesale discounts, and our contractor discounts and time saved we normally he buyer having to shop around, we save well more than 10% to the investor. I would suggest homeadvisor.com or another website where you can type in the scope of work by zipcode to get an estimate on pricing if you really don't have any contacts but your best bet is to actually ask investors in your area or local REIA what things cost. In my experience when a realtor has to put numbers in to make a deal look good it's because it's not a deal because another investor would recognize it's a deal so quickly they don't need somebody to give them numbers. There is a home inspection report on the Bigger Pockets file place that we uploaded to help you get the list of repairs you need together. You can use this to recall what you need repaired if you don' t have the experience to do it onsite.
Attorney · Cherry Hill, NJ · Member since 2017 · 62 posts · 21 votes
8y
@Casity Kao Thanks for your input, Casity. Being skeptical of realtors putting numbers on the listing is a great tip. I have seen that for a number of properties in my area.
When you say, for example, $4500 on a new kitchen, how do you justify and explain that cost to a partner or another investor? I think the answer is two-fold but I wanted to get your take on it. If the rehab raises rent by $100/month, (1) you would recoup the investment from the extra cash flow in about four years ($4800) and (2) if comparable properties in the area also have updated kitchens, you have likely forced appreciation for your property, creating instant equity that hopefully exceeds the $4500 in cost. Is there anything that I am missing?
I will definitely search for and use your home inspection report.
Realtor · Grand Rapids, MI · Member since 2016 · 174 posts · 122 votes
8y
@Ian Livaich Your assumption is correct, but to give a little more detail I look at repairs as serving two reasons raising rents with a high cash on cash return, and forced appreciation. By the numbers in general I think most "experts" would say kitchens and bathrooms get the most return on money invested, IF invested smartly and I would say I generally agree as well but lets use that same example of a $4500 kitchen for 100 more in rent. Assuming I can get my money back out that would be roughly $21 more payment on a 30 year mortgage, so if I feel the forced appreciation would increase the value of the home then this is a no brainer because I begin cashflowing $79 a month the second I am able to refinance so I have infinite cash on cash return. Assuming I cannot pull the cash back out then my annual cash on cash return on that 4500 is still 26% (assuming I self manage). Either way the numbers look good. Most of time we are buying 20% below market in addition to forcing appreciation, so we can cash out refinance most if not all the funds we put in for our down payment and renovations, so our goal is to cashflow positive with no money in so we can repeat the process. So you are correct in your assessment but instead of doing a years to recoup I look at is as a function of 1st year or annualized return.