What is your ideal( keep it realistic) rental?

Question

Do you prefer complete rehab, minor touch ups, or rent ready rental homes and why?

Early on I wanted rent ready homes because I was just getting started. However now I prefer properties that need more work up front because you can get them for a fraction of the price and you can sleep at night knowing every is working properly.

What do you guys think?

JD Martin · Answer

This is my preference these days as well. I used to prefer opposite - full on basket cases - but there's less money now to be made in them than there used to be, at least around here. Actually, one of my favorite rentals is the ugly but functional rental that makes other people puke - the hoarder house; the cat-piss house; the roaches house. These places are usually pretty solid but end up selling at a deep discount because they're just so disgusting. You get the disgusting dealt with and you have a solid house for a nice price. My other favorite is the estate sell-off, especially if there's multiple people involved. I have made some good money offering cash to people who just want their share now and aren't willing to clean a place up or do anything to market it well.

As far as physically, my ideal rental? A 3/1.5 brick ranch with carport built from late 50's to early 70's. Tend to be solid foundations, little exterior maintenance, updated electrical, copper plumbing, good layouts, not too close to other houses, solid neighborhoods, one level living. I drool when I see these come up for sale :)

John Chapman · Answer

Honestly, after nearly twelve years of landlording, I'm pretty much in favor of new construction if you can somehow make the numbers work.  A while ago, I would have said complete rehab because it's a "like new" house that you can buy at a discount.  As I've done this longer, I've realized that, no matter what you do from a rehab perspective, it's pretty hard to get a brand new house from a rehab, at least here in Texas.  Maintenance is generally always going to be higher on older houses, period.

Also, I'm not even sure anymore that SFRs make sense for the super long term.  As @Jay Hinrichs points out, after 7-12 years, you're looking at a complete rehab in the tens of thousands of dollars.  (Unless you want to run it into the ground, which comes with its own issues.)  The truth is that these buildings were not built to be rentals and so they're inefficient from that perspective.  If you buy in super high quality markets (like on the coasts), massive appreciation can bail you out.  For "normal" markets, I'm just no as convinced anymore.  I say this, too, as someone who has benefited from very good appreciation.

John Chapman · Answer

Yeah, @Jay Hinrichs, those numbers are about what I would expect.  I dumped a rental a few years ago, and I think it was between $15-$20k to get it retail ready.  (That seems pretty standard if you did a good job on the rehab on the front end.)  Depreciation recapture is a downside that is significantly minimized on BP, it's a real thing that you have to deal with if you ever want to get out of rentals.  (Which after a number of years, most sane people want to do.)  The rate is generally higher than capital gains and it just eats up a significant chunk of net proceeds if you've been holding for a while.

I just shake my head when I see all these newbies proclaiming stuff like, "I just bought 10 units in 10 months" or whatever, particularly if it's in historically flat markets like the midwest.  Sure, they're cash flowing for a few years and feeling like geniuses (I did the same), but then those big expenses creep in and after 7-10 years, and the next thing they know they're staring a nice big fat rehab bill that eats up all that cash flow from the previous years.  (And if they bought them all around the same time, those bills just stack on top of each other.)   I got bailed out with appreciation and rising rents, but I wouldn't bank on that again, at least in my market, for some time.

Steve Vaughan · Answer

Minor touch-ups for sure.  This can vary in scope, but my best house deals have come from sellers that have a problem tenant still there or one that just left.  Trash out, clean and paint.  Value-adds of 5-10-20x.

Multis were the same way for me.  Old and fed up with bad management and/or headaches.  Stabilize and hold.  Each dollar of additional NOI in this market = $20 in commercial value increase.

If I were a flipper with a crew, full rehabs may be on my radar.  We specialize in what we know. Good question.

Bjorn Ahlblad · Answer

@Shane Craig a few years ago you could buy 'rent ready' SFR and MF in many markets and make money right away. I have not seen one like that in a while. Today, if you want a decent return, you will need to do a rehab to bring the property to market rents.

Currently I am looking for 6-20 units in my area that would provide an opportunity to reposition the asset, bring the units up to where they will command market rent, most likely replacing the existing tenants. In our area the majority of renters are MTM mitigating the burden of loss to lease.

Jay Hinrichs · Answer

@John Chapman  I bought 12 new constructions in the south post Katrina for GO zone tax bene's so I made money day I bought them.. they broke even were very easy to manage I could even have my secretary manage them from ORegon.

just used an agent to place the tenant and had a good handy man..

the issue I ran into is when I wanted to exit from landlording. Even these homes now that were in service for 10 years plus they needed to be updated to the latest trends to sell retail.. so on average I put about 15 to 20k into each one to sell it.

End of the Day if I had not gotten the special tax treatment these would have been not so great.. recapture is something to deal with as well.. rentals to me are life time pursuit. most don't have any clue as to what its going to take to exit both in rehab and tax liablity ( unless you 1031) but then you have to stay in the rental game.

Khalid Bryan · Answer

@Shane Craig I like rent ready homes if the price is right because as an investor, you want your money to come in with the least amount of effort on your end. Hire a good inspector and collect a rent check shortly after closing.

Anthony Rosa · Answer

It would all depend on the  location. I buy for appreciation. I'd take a rehab job provided the foundation is sound and there is no water infiltration. Water destroys everything!

I believe that if you take care of the home it will take care of you!

Andrew Syrios · Answer

Not sure yet. At least eight or nine hundred. Maybe a thousand if I'm lucky...

Shane Craig · Answer

@Andrew Syrios

How much are you going to rent that for monthly? LOL

What is your ideal( keep it realistic) rental?

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