two school of thoughts when it comes to rehab

[Jason Malabute]

Question for experienced investors only.

Let's say your general contractor quotes you at $12k per unit to update interiors (paint, install vinyl floors, formica countertop, refinish cabinets, and new appliances). Also, let's say $3k per unit for exterior, common areas, and capex.

There are two school of thoughts when it comes to rehab:

1. only do deals if it still makes sense even if you do the full $12k + $3k rehab. (You will offer lower purchase price, and you'll probably won't be competitive on many deals).
2. calculate the rehab cost backwards based on a 15-25% return on your rehab based on rent bump. For example, if you are getting a $150 rent bump and want a 20% return. Then your rehab cost can only be $9,000 ((150x 12)/20%). Then you would ask your property manager if you can get away with a $9,000 rehab instead of the $15k and what interior rehab line items are a must (paint, install vinyl floors, formica countertop, refinish cabinets, and new appliances) to get the $150 rent bump?

The 2nd option will let you make a higher purchase price, but the risk is what if you under estimate rehab cost in long run.

Question:

If you are working on your first deal in today's market which rehab underwriting strategy should you go with?