How much should you fix up in a property?

Question

Hello! When you are analyzing deals, how best can you estimate what the rehab costs would be for the property, especially if you are not local to the area and are judging mainly based off of the pictures?

Jonathan Greene · Answer

I don't really get questions like this since there is only one way to property estimate rehab costs. You, or a trusted professional, goes to the house and spends the time to take note of everything. Barring this, you will lose. And whoever is looking needs to pay attention to big ticket items - electric (is there knob and tube or a big upgrade required), roof, plumbing (sewer inspection with a camera), septic and/or oil tanks, asbestos, is the furnace working, mold, structural integrity. If you are new, you can't estimate rehab costs at all, much less from afar.

Jim K. · Answer

@Greg Koszkul

Hey, we really are getting somewhere in this thread. This question gets asked frequently, but rarely with such pared-down precision that illustrates the flaws in the question, as @Jonathan Greenejust pointed out.

There are two parts of your question as asked that I'd like to highlight. First, you're not local, and you likely don't have fully vetted and trusted local people in the area or you wouldn't be asking the question. YES, you are at a significant disadvantage, and it's going to be monumentally difficult to do well, even with resources such as those that have been mentioned already. Even if you were local, this is always complicated, even if you have a hundred deals under your belt, and many investors never really do it well.

Now, as I said earlier, there's a second aspect to your question that no one's talked about yet in this thread. What KIND of deal is it? Is this for a flip, a buy-and-hold deal, a BRRRR play? What property class are we talking about? Are there people living at the property at the moment as tenants? Single family or multifamily? You can't really even start answering the question without that information and more, because the optimal renovations you would do for a newly-acquired property would be quite different based on your answers to those questions and of course, your goals, both for the property itself but also your role dealing with the property and with real estate in general going forward.

Corby Goade · Answer

@Jonathan Greene is right, but you can partner with a local investor or realtor and get the job done. I'm a realtor and I partner with lots of out of state clients, you can split up the profits however you like based on risk and time involved.

Derek Harris · Answer

@Greg Koszkul the best way to accurately measure the rehab cost is to walk the property with a contractor that you trust and/or through experience of your own. I recommend reading the Book on Estimating Rehab Costs. It will give you a rough estimate on what to expect for different rehab line items. You should also try to find an investor local to that market. As far as basing it off pictures, there's always risk that the property is way worse than what the picture shows. I would look over the seller's disclosure, if available, and possibly have someone on ground to walk the property for you and take their own pictures.

Jim K. · Answer

No, BRRRR is a specific kind of buy-and-hold investing. I was trying to make the point that the small DIY handyman landlord buying and renovating for the purposes of holding on to the place for a long time as a producing property will do a significantly different sort of reno on a property than a BRRRR investor whose main interest in the property is getting as much of their money out of it to go looking for another property.

Jim K. · Answer

Ok, Greg, I'm going to ask you to get a better profile up here describing you and your goals in real estate as well as identifying your general location if you continue to ask questions like these. It's a lot easier to write shorter, better targeted responses to questions like these with that information.

But today, I have to hang some meat on the bones of your answer to give you something that's not reduced to absurdity in an abstraction, so I have to go with what I know best here in western Pennsylvania. You've asked two questions here: (1) How does a renovation for a buy & hold differ from a BRRRR (you speculate that there like isn't much difference), and (2) how would renovation decisions differ between single-family and multi-family?

(1) The key thing to understand about the BRRRR is that an elevated amount of attention has to be paid to assuring a good assessment after renovation. The buy-and-hold does not require this, and the money is better spent on hardening the property. I want you to imagine two very similar 2/1/1s in the same C-class neighborhood in a place like Pittsburgh. Imagine both properties are 90 years old and wired in knob-and-tube construction. You buy both of them, renovate one for long-term buy-and-hold and the other for BRRRR. The BRRRR is going to have the garage floor painted in metallic epoxy, it's going to have nicer, usually larger, appliances in stainless steel, you're going to put in recessed cans in the ceiling. You'll remove most of the K&T in the basement and upgrade to Romex.

You're going to self-manage the buy-and-hold, and like me, you know a bit about the dangers of oul Pgh single-family. Every last switch and outlet in the place is going to be replaced with heavy-duty modern versions. All the breakers in the box will be replaced. Upstairs in the bathroom, all the towel holders will be replaced with weight-bearing versions. The basement laundry will be basic white and sized to be easily replaceable up the narrow basement stairs of the aging property.  The kitchen fridge will not be an  oversized monstrosity to feed an army out of. You will thoroughly inspect the basement K&T and if it isn't damaged, you will leave it in place. You're not worried about any upcoming assessment. You're worried about hardening and running the place as efficiently as possible.

I hope this helps with Question 1.

I'm not going to address Question 2 because there are other, better-prepared people here to answer that than the likes of me.

Greg Koszkul · Answer

How would this deal differ for a buy & hold versus a BRRRR at a high level? Both would still require you to extensive due diligence and probably hold very similar risks in terms of the potential for the property to be in condition holding many red flags. Also: If we are talking about estimating these costs before the purchase, how would the game change between SFH and multis?

Thank you for the responses!

Paul Witte · Answer

Great discussion here.  I really appreciate the initial question and follow up questions/thoughts by others.

I agree with the last poster--the end-game will help you answer this question.  I just went through this process in excruciating detail for a duplex I walked away from during the contingency period.  Here was my situation:

This was a 100 year old duplex with all but essential maintenance deferred for the last 40 years.  It was in a good neighborhood, but the building was in bad shape, and rents reflected that.  The market for a 3BR/1.5BA in the area was $1100-$1500, and these units were rented for $900 each.  So I ran numbers on several scenarios: keeping the condition and rents the same, doing a medium renovation and fetching maybe $1150/unit, or doing a complete renovation and fetching up to $1400/unit.  Then I worked backwards from there and estimated costs associated with each level of rehab and how much rent I could get back from it.  In my scenario, because I was estimating pretty high capex and repair budgets because the building was so old and poorly cared for, the most $1400/unit rent level seemed likely to generate the best return.  I surveyed other units in the area renting for that level, and the decided on a scope of work to bring it up to that condition.

In the end, I walked away because (estimating conservatively), my cash on cash return would have been only 8%, and given the amount of risk involved in such a big job, I didn't think that was worth it.  But the process was really valuable to me, and well worth the time investment.

In your case, as others have pointed out, you should first figure out what needs to be done, and why.  You don't want to under-rehab the property, but you don't want to over-rehab either.  Once you have that figured out, only then can you (with the assistance of collaborators or partners) estimate the expenses involved.  There may be different scenarios that are workable, depending on the property and your situation, and you will have to figure out what in your case is likely to provide the best return.

Corby Goade · Answer

@Nate Sanow I'm not a lawyer, so take my advice with a grain of salt. What I typically do is just draft up a contract that we agree to either as individuals or separate entities. I only partner with people who I know their character well and who are reasonable and fair people. I don't partner on buy and hold deals, too many variables. For flips, I typically break down who has what responsibility and what percentage of the net that responsibility is worth. It's really important to define what the "net" is. It seems simple, but there will be many little things that you don't account for.

For instance- if one of the partners is borrowing hard money in their name for the purchase and they have to pay points and interest, is that their personal expense or a shared expense?

It can work in any way, you just have to iron out as many variables as possible up front.

Best of luck!

Nate Sanow · Answer

@Corby Goade

What do you think is the best structure for that? LLP with GP & LP roles?

How much should you fix up in a property?

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