Level of Finish Out on a Fix and Hold?

Question

I have been participating as the capital partner is a major renovation (90% new) in historic Charleston. The area is likely to appreciate, and so even though I can make $25,000 if I flip it in a month, I am also in the market for a new buy and hold, so I was thinking of maybe holding this one and perhaps cash-out refinancing. The cash flow isn't great because it is a house that is worth well above the median price. But as I said, the appreciation potential is good. I could possibly see $10,000 in appreciation per year and sell it for 4% using my real estate license in 10 years. I also saw the build like twice a week, and had a reputable architect and GC involved. So it is no cracker box, which is fully 1/3 of the reason I would want to keep it. Also, I bought the thing for a decent price, and although it cost fully $100 per square foot to rehab and add square footage (from 950' to 1600'), the contractor is taking 10%, there is the feeling that I got some instant equity by having decent/modest numbers and not having to spend $25,000 on the costs of sale if I don't sell through two agents and the attorney and all that.

So my question is, are there any thoughts on holding vs. loosing this property?

I am also curious how you would finish it out. Things such as stone counters and stainless appliances are obligatory. With things like lights and hardware and moulding I was going to go about medium. Windows and roof are what they are. Hardiplank is what it is. But I could make a few decisions with flooring and such that might be somewhat different if I were going to keep it. I think there might be something to this idea: nice carpet in the down master (I myself prefer nice carpet to wood in bedrooms), solid bamboo floors on the first floor (sandable 3-4 times and completely waterproof and fairly hard and sustainably made) and up the stairs, vinyl tile in the laundry room and HVAC closet, and standard carpets in the two smaller rooms upstairs. I am thinking this because a) kids probably prefer carpet, b) parents probably prefer carpet under most conditions for their kids and c) if it's three college kids then they won't much care. Also, d) carpet can be pulled out and replaced fairly inexpensively if tenants screw it up - more so than the wood. On the other hand, solid wood floors would probably pay for themselves if I didn't have to swap out carpet maybe twice or three times, and they are pretty impervious to dog smell and urine.

Are there any thoughts on what kind of finish out to do if i plan on holding the place for 20 years and if the rest of the build is probably above average in quality? I need to get someone to pay $2,000 a month in rent, so this is not a simple matter of "go as cheap as you can to save money and not offend the tenant." These tenants are beyond the "Wow, this stuff is all new!" when in fact it's new but low grade stuff. This crowd is less particular than if they were purchasers, that is for sure, but still I don't want to have folks be like "I'll rent this for $1800 but not a penny more." And then there is the maximum durability question.

Jason Merchey · Answer

OK I will think about what you say re: pre-finished wood. I also know that it has less chance of warping. I guess it's not impervious to water, but fairly water resistant.

I hear you on the oak/bamboo thing and will think about seconds and ash.

I probably also will come to accept that wood will help the place rent for $2,000 better, and I probably also have come to accept stainless vs. black (though I have a nice black fridge that is nearly new and would thus save me $1,000 after transportation costs)

John Semanchuk · Answer

There's advantages to both wood and carpet. I just think wood sells so much better and you can get better rent/be pickier about tenants with wood. I put cheapo laminate in one of my houses when it was all I could afford and even that is more appealing to tenants than carpet would be.

In a studio above a garage that I have, I put Lumber Liquidators solid oak flooring but it was only 1/4" thick as I didn't want to have to reframe the entry door. It's a big draw in that rental when prospective tenants see the wood. 8 years and it's holding up fine (except for where the very first tenant drug a bed around and scratched the bejesus out of it). As a single person studio it gets less traffic than most households would see.

Also, prefinished wood has (so they say) a much better finish on it. The finish they can apply under factory conditions contains more silica and holds up better than finished-in-place poly. Seems to be true from what I've seen.

I would also use whatever "deal" I came up with in the way of wood. Seconds are often fine, Ash instead of Oak is fine if you find a deal on it. In fact I think oak says "suburban" to a lot of people and might not be a plus in a downtown house. Same for Bamboo but all that just depends on the whole look you're getting anyway.

I'm working on a deal for my daughter that, if it goes through, we'll put tile in the lower floor (slab) and we'll be answering the same question for the upper floor. We'll either go tile or wood upstairs. (It may well be a rental for college students.)

Richard C. · Answer

"Impervious" is maybe not the word. If you have people abusing you floor and letting liquids sit, it is going to get through the wood.

Certainly I would rather have someone spill a glass of wine on hardwood than berber.

I have only used engineered wood once, in a laundry room. It looks fine, but is recognizably not actual nailed-in-place wood. Feels different when you walk on it. I admit, this was cheapo stuff from Lumber Liquidators.

Jason Merchey · Answer

Ok, nice. Thanks for that info.

Can you offer any insight as to the a) standard prefinished engineered hardwood vs. b) the 3 coats of poly atop solid bamboo or oak or some such wood to create the impenetrable surface re: water, dog urine, etc. vs. c) putting carpet in the three bedrooms and vinyl tile in the washer/dryer closet? I think of the first one as being "all wood" but not as durable, though less expensive, the second as more expensive but worth it due to the durability and imperviousness to water, and the third as saving about $1,500 now but not being "all wood" and not having the durability of either wood choice. Of course, carpet is easier to switch out in case it becomes time, and less expensive, in the bedrooms at least. I have the money to do any of the above, but I want to make the right move. I hear what John is saying about carpets, but I'm talking like Berber here. My wife and I just kinda prefer nice carpet in the bedroom. But maybe we are unusual.

Richard C. · Answer

The hardwood question is one I actually can answer.

Poly. 3 coats. Springing for the extra coat on install is extremely inexpensive.

Screening, not sanding. Rather than sand and refinish once a decade, have a flooring guy screen and recoat about once every 4 years. Maybe five if you are lucky. You never need to actually sand it down and refinish if you never let the wear get through the topcoat. Screening and recoating is a simple job to do yourself, no complicated or expensive tools like a full floor sander. Or in my area, screen and recoat costs about $1 a square foot to have done by a flooring guy.

Jason Merchey · Answer

Whew, we just got rocked by ice!

I know, right! I had a nightmare tenant once. Whew. I also build in a fair amount of flexibility combined with limits with my condo renter (Pelican Pointe, in your neck of the woods) and it has kept the same tenant in there for 2 years now.

Thank you for the tip on the hard wood. Yah, I might have a personal attraction to carpet in bedrooms and I should dispose of that. I am kind of fastidious and so I find hardwood to show dog hair very easily. Of course, I have 300 pounds of dogs, so that might explain that :p

This is at Rutledge. It's hard to miss because it is so thorough of a reno and is the only one on the street so far. It's 1600 feet, down master, some historical touches. The downsides are the yard (small) and the view (neighbor has a friggin disaster of a backyard).

Yes, I really do sense that buying low in 2013 and holding for years is a smart move. Do you see 5% a year in appreciation to be a pretty achievable number?

Do you feel like getting solid hardwood that has a couple coats of poly over the entire floor is a good move due to the durability, water imperviousness, and sandability? My goal would be to only have to resand it every decade and never have to change it out. Going for durability and long term value.

John Semanchuk · Answer

Hi Jason,

I think you might be on track to hold on and get some equity gain over a few years as opposed to selling right now. There is some risk there but it sounds like you've thought that part out.

If you finish toward the high side, you can just rule out college students and be more picky about sensible tenants. With a higher side rental, I would stay away from carpets but that's just my personal preference. I think carpets are a nasty mess before long and most people don't prefer them. I really think a certain % of higher end renters will see carpet and leave disappointed.

Is it the small 2 bdrm on Sumter? I assume you've added sqft? How many bdrm/ba is it you're wanting to rent out for $2k?

Note: I'm not an expert at this either but having been a landlord with a few James Island suburban houses for 10 years now and for me it works to make them as nice as possible and be picky about the tenants. Saves a world of headache.

Jason Merchey · Answer

No you might be onto something there. I guess I would be going for the savings of $5k up front, as well as the fact that carpets are somewhat preferred in the kids' bedrooms upstairs. Maybe you're right that the down master should definitely be wood. And the stairs. Either way, I have this hunch that going with solid wood floors beats engineered due to the fact that you can sand it more than once. I think though am not sure that you can seal solid wood better than you can engineered as far as pouring two coats of poly on it after installation.

Richard C. · Answer

Understand, I have no idea what I am talking about :).

But since renters from outside your region were mentioned, I just thought I would put out there that in some areas (mine, for example) wall-to-wall is definately considered a lower end floor covering, and if we were moving to Charleston and renting at $2000 a month, my wife would definately insist on hardwood. And I kind of think people who like carpet might think, "Hey, I guess I'll have to buy some area rugs," while people who hate it have no way to get around wall-to-wall. For what it's worth.

Jason Merchey · Answer

Hey Tony. It is on Sumter Street, at Rutledge. The West Side. First house on the block, though as you probably know, there is increasing investor activity in that part of town.

Yah I hear you on the Boeing thing. I think that is a possibility for this tenant, but probably more likely would be a young professional couple with no kids, a couple with kids at Porter Gaud, a medical doctor at MUSC, or the law school, or a group of three C of C kids. All of the above would like a decent finish out in the kitchen, though our bathrooms are fairly simple. Probably don't care too much about moulding and lighting or energy efficient this or that. Appliances can be standard Kenmore or LG. I imagine that the likelier it is I get three college kids the more beneficial the solid wood floors will be. Even college kids probably can't screw up quartz counters and bamboo floors. Carpet, yah. Furniture, yah. Kids mostly don't clean stuff is all. But I am going to be on them like white on rice - basically get double the rent in security deposit or get co-signatures from a parent or two, and visit three times a year. Also maybe find econ or bio majors instead of psychology ;)

Level of Finish Out on a Fix and Hold?

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