How do you balance the rehab without over rehabbing?

Question

Looking for opinions:

We are currently rehabbing a house in NJ ARV will be approx. 130- 150k

2 bedroom and 1 bathroom house (approx. 600 sq. ft.)

How do you know when you are doing too much for the project?  What sort of things do you look at before you start and say I can leave this is in or I need to do this.    Do you always demo the kitchen and bathroom? (Because this is what sells the hose) (I understand it is case by case and condition). I got hardwood floor will just refinish them.  I am using Ceramic tile on the floor in kitchen and bath and in the showers.  Should I have just gone with linoleum and use a shower insert?  It is easy when the house is really bad condition and everything has to go.  How do you judge a cleaner house?  Would it be different based on your exit strategy?  Example if I am Fix and Flipping Retail or going to keep it for a rental.

Thanks for the all help and advice.

David

J Scott · Answer

Go look at 20 houses that you consider to be your competition, and rehab to just slightly above those those.  Keep most of the same finishes, with one or two nice upgrades.

Katharine Chartrand · Answer

I find it very hard not to over-renovate.  I enjoy renovating.  I enjoy providing putting a house I am proud to sell on the market. But I also enjoy accounting, meticulously tracking costs  and analyzing numbers.  I can see that don't get my money back from the extras.

I want to sell people a house I would live in myself but in my market it seems that the maximum value comes in getting the house habitable and financeable. Beyond that it is all price per square foot.

My buyers are moderate income and price conscious. They don't care about the beat-up linoleum in the bathroom.  I am guessing they think they think that it is something they can take care of themselves.  They'd rather get the extra bedroom than the bathroom remodel.

Landscaping is absolutely zero return. People think they can just snap their fingers and get a manicured lawn and trimmed trees.  My buyers put no value in landscaping. To the extend that landscaping matters, I get around it by arranging the timing so most of my houses sell in the winter when everyone's yard looks about the same as mine.

So that's my market. I am in a very tough buyers market with slim margins and you can't spend a penny more than you have to on renovating.  It's a miracle that I haven't lost money on deal yet.

I get universally terrible advice from realtors and contractors who are always pushing for what I know now is too much renovation. Even my realtor, who is experienced and brilliant, is obsessed with closets in bedrooms and the number of bedrooms and you need to add a second bath to be attractive to families.

I don't question their intentions, but I know the numbers. After 6 flips, I can document pretty clearly the money lost on extra renovation. They payback is not there.

If you are new don't have a lot of money to test out different strategies, undershoot on the renovation while you study your buyers.

>KNC<

Jesse T. · Answer

If you are flipping I would try to go slightly above typical market.  It probably doesn't get you much in selling price, but the little extras should help lower the time on the market.

For a rental you want to match the market, but the main thing is durability.  Over the long-run tile will probably cost you less than linoleum.  Not saying you need them, but part of the popularity of granite counter tops is that they last and don't really wear out.

Derek T. · Answer

As others have stated you need to view your competition and rehab a bit better than theirs.  Once you do a few you will have a certain look and material for your rehabs.   When I buy a house I already know I'm going to do the bathrooms,  kitchen,  paint,  floors,  new doors,  etc, etc, etc. It doesn't matter what condition they are in,  because if they were already great then I wouldn't be getting a good deal on the house.  I could probably get away with not doing some of that stuff but I know the look I want to have for my end product and I know what the competition is going to put out.

My only concern is how much structural to do sometimes. Sometimes I contemplate opening up walls or reconfiguring a layout compared to just getting in and out with the same layout.

Eric B. · Answer

@Bill D. I like your approach. 3 to 4 years implies a rate of return of 33% to 25% on your marginal investment.  Which is hard to beat by say buying another property or some other opportunity.  We are really nibling around an ecomnomic concept here called "opportunity cost".

@David Semer Your welcome.  Explaining things to others is the best way to get something straight in your own head so this benefits me too.  Google "opportunity cost" that might help you a bit.  Dont forget also one in the hand two in the bush which is to say dont invest everything you have trying to maximize return.  I also have to remember that because I'm an optimizer and want to keep all my money working.

Bill D. · Answer

David

I am starting my 8th year as a landlord and I also still struggle with this.  I think Jesse hit the nail n the head tho... if flipping improve slightly above comps and if renting improve right to comps with one or two "extra touches" to draw them in.  I have 3 leases that will be ending this spring and I am trying to put together my game plan for those 3 as well.  I definitely look for low maintenance/durable options. I also have heard others on BLOGS mention that rental rehash should pay for themselves in 3-4 years (increased cash flow due to reno should pay for reno within 3-4 years).

Good luck.

Eric B. · Answer

For me I do valuations based on rent.  So I look at what the rent increase would be for a finish and then compare that to what it would cost.  Then I break that down into a rate of return.  For rehab flips that could be tougher but I think that my approach can be a nice way to value your marginal improvements.  I also initially want to over renovate most projects but the numbers need to tell you when to stop.  My wife is also a great emotional break on my ambitious plans that I hatch.  Its good to have a team member like that.

David Semer · Answer

@Derek Tyler

Thanks for sharing your opinion.  I have been doing what you said too.  Just always trying to learn from others.  Not trying to cheat out.  Want to be proud of the product we are putting out to New Home Owner.  Just trying to figure out how to maximize my $.

Michael Lee · Answer

Hello!  Did you do your due diligence?  The market tells you what you can do.  Did someone that knows how to do estimates do it?  It sounds like you did not due what you should do. I do not know the market you are in but it should tell you what works.  You should at least get good estimates and a total before you start anything.  Your experience will help you.  Yes, your exit strategy does matter.  You might have to keep it and rent it out.  Good luck!

David Semer · Answer

@Bill D.

I appreciate you offering your expertise.  Nice to see no matter how experience you always try to look at your business and improve it.  I have to get better at the planning ahead as you are doing with those rentals.   You have clearly seen some difficult markets over those eight years.  Thanks for taking the time for support.

How do you balance the rehab without over rehabbing?

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