Does more money invested into rehab = higher ROI?

Question

Hi,

I've been rehabbing homes for about a year now and have only been doing paint and carpet for more of my properties - very light rehab work. I've been learning about other investors around the country who do EXTENSIVE complete renovations and getting pretty damn good returns.

I am debating of changing up my game plan and spending more money on rehabbing for nicer properties. Not only for a better portfolio but also for top dollar. My returns have been mediocre (average 10-20%) and I'm wondering if I did more extensive rehab, will I make more money? Would love to hear your thoughts - thanks!!

Vikram C. · Answer

Tony, the absolute return on a property should be higher for more extensive rehabs because you can buy them cheaper.  Houses in good condition are harder to acquire at a big discount to ARV.  (In addition, a more extensive rehab will help you during the appraisal process.)

The flipping business depends on maximizing annualized ROI and not the absolute return on each property.  That means that you need to consider not only the ROI on the property, but the period of time during which you earned the ROI.  More extensive rehabs can take longer to complete and therefore increase your holding period.

The ideal property would be one that has characteristics that make it unattractive to retail buyers but can be fixed by you without having to spend extensive time in rehab.

Vikram C. · Answer

Yes, the reason we look only at annualized return and not by the property is because we are investors.  Our job is to allocate capital in the best possible manner, and that means earning the highest return over a period of time on that capital at an acceptable level of risk.

To maximize your annual profits, all you need to do is to maximize your annualized return.  If, instead, you try to maximize the dollar value of profits from a specific deal, you will often find that you make less money over the course of the year because you let your money be locked up in one deal for too long.

Will Barnard · Answer

Tony, your question is not easy to answer as there exists many variables such as location, market conditions, buyers tastes, economy, ability of investor, etc.

I would say that it is more important to spend wisely in wise places rather than a blanket spend more money approach.

Here in the areas I invest (middle income to above average income to high income) buyers are looking for properties they can move right into without having to spend any money on the home, just the furnishings. As such, having granite countertops, higher end carpet, multi paint colors, lush landscaping, new kicthen appliances (stainless steel), mirror sliding closet doors, ceiling fans, recess lighting, etc. all cost money but get high returns in my area.

One other note: Because I complete higher end quality rehabs, my time on market before accepted offer averages under 14 days! I dhave less objections to overcome from buyers and thus, get hgiher prices for my homes. Is there a specific number I can provide you such as I spend $100 on item A and I get $200 more in my sale price? No, but I do know that my hold times are less than most investors and my returns are usually 20% or higher and average of under 100 days total hold time.

Perhaps if you provide more specific examples of a rehab you have completed from start to exit, we could be better positioned to advise you.

J Scott · Answer

Not too much to add to the great responses here, but something I always keep in mind is to analyze a deal based on its individual potential, not with the preconceived notion of what type of investor you are.

In other words, instead of saying, "I invest in paint-and-carpet rehabs..." you should instead be saying, "If it's a great deal that I can handle, I invest in it..."

For us, we have typically done major rehabs (often down to the studs), but we certainly don't rule out smaller projects.  In fact, our last two purchases have been paint-and-carpet type rehabs that we've been able to complete in 3 days for a quick profit.  We've even done some wholesale deals on properties that we didn't want to rehab, but knew we could make a few thousand dollars quickly and easily.

We evaluate every deal on its own merits -- how long will it take to complete, what is the cash investment, what is the likely return, what is the likely holding time, what are the perceived risks, etc.  Some paint-and-carpet rehabs have been our best overall returns, though our major rehabs tend to have the most indirect benefits (keeping our contractors busy, ease of acquisition, pride in the end results, etc).

Certainly the bigger jobs should have better returns (combination of absolute value, ROI, indirect benefits, etc), but usually that's not a problem as they are less desireable to many investors.

Tony Nguyen · Answer

Hey guys,

It sounds like it will be a case by case and not a blanket approach with each property. I will go ahead and analysis each property as I get them and only make repairs where it counts most. Good advice too from you guys about looking @ the returns more from a annualized point of view and not just property by property.

Once again, thanks for your help!

Dale Osborn · Answer

You are right - Will - I did leave out the curb appeal. I had an argument over the same issue with my first rental home in 1982. We were looking at selling it and moving on. Realtor suggested fixing up the inside first - of course this did not help. By changing the shingles on the roof and a fresh coat of paint on the outside & the home was sold.

Account Closed · Answer

A lot depends on what you purchased the house for. If you bought a house for 125k that has comps on the same street for 325k, you could put more into a renovation than just paint and carpet. If you visit the other houses for sale and find that they are actually very nice, sometimes paint and carpet won't cut it. To compete in this market you must at the same time be the cheapest house for sale on the block, but usually also the nicest.

Dale Osborn · Answer

Money is best spent for kitchens & baths - rest you are just pouring down the drain. You have to determmine who you are marketing to. If can afford to do better rehabs try it and do a comparison. If it works for you go for it - comparing yourself to someone else or asking others where you should spend your money in your business does not always help out!

Does more money invested into rehab = higher ROI?

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