Buy & Hold: Do you treat the rehab like a rental or retail?

Question

When you buy and hold property do are your rehab numbers come closer  to the rental or retail side of things?

One train of thought I come across is to go ahead and do a full retail rehab while you rent it, if the duration of the rent is short (3-5 years), then assuming the tenants havnt trashed it within that 3 year period, you are ready to sell it with little work to be done when market turns around.

The other train of though I hear is do more of a rental rehab, then after the market has turned around go back in and do additional improvements to put it at retail condition and sell it.

What are your thoughts on this? Thanks

Dylan Long · Answer

I think part of it would depend on what market you're renting in, and the caliber of tenant you rent to. If it's a higher-end rental market, you could consider using higher quality items and getting a higher rent value, then sell it in a few years time. If it's a lower-rent area, or you expect to rent to people in a low-middle income bracket, you may want to go with cheaper materials with a plan to refresh later on. That's not to say all low-middle income renters trash a place, or all high-end renters don't, but you can use income as a factor (one of many) to determine what your potential renter may be like.

Brad Z. · Answer

I take a hybrid approach. I only upgrade things that are durable and have less of a chance of being trashed. Ex. go ahead and refinish hardwood floors but dont replace cabinets and countertops. Also, dont do anything that will cause re-work. For example, dont put a newer countertops on older cabinets if you can help it. If windows and roofs are on their last leg, go ahead and replace, very little chance a tenant will destroy those items.

Brandon Turner · Answer

Good question Samantha. I have experimented with both avenues and I agree a lot with what Dylan said above - it depends a lot. However, I have found that by doing a 75% remodel before renting a unit out (updating all plumbing, electrical, roof, etc)and then finishing with new paint, flooring, counter tops, etc before the final sale.

Grant P. · Answer

These are my thoughts exactly.  I have yet to have any trouble, and am extremely picky about who I rent to after putting so much blood, sweat and tears into these reno's.

Brian Burke · Answer

The above comments are all correct, and I'll add that for me it's about the numbers. Calculate what you will spend on a lipstick rehab, and what rent you will get. Calculate the return on your committed cash.

Next, calculate your cash on cash return on a retail rehab.  Which one is higher?  That will be the one to choose.

Dylan Long · Answer

Whatever works best and saves/makes you the most money :). At $300 sq.ft, your rental value may be high enough that you're renting to well-to-do tenants, who may not be as risky as *some* lower-income tenants.

Grant P. · Answer

I have a different strategy than most on here, as I really am more of a rehab-er lately.  I buy unrenovated properties in hot parts of town and create value with extensive high end remodels.

My current renovation I purchased for $156 psf, and will exit near $300 psf.  I am doing the retail renovation as this is where the real value is created with my model, but until the market slows down I am holding these as rentals as I still cash flow plenty.

Most guys on the site here just do lipstick renovations for rental purposes, so my model does not work for them.

Ann Contorno · Answer

All sound advice.  Definitely do the guts regardless of holding or not- plumbing/electrical/HVAC.
Totally agree with Brad and Dylan - replace durable items like laminate flooring and definitely do not replace cabinets and countertops.  If you do, you will want to cry when you go into the place and see how they left them.  Stay away from putting in carpeting, and leave old/existing, interior and exterior doors and light fixtures.  Invariably, and I don't know how, I always get houses back with holes punched through doors, missing doors and light kits hanging off of ceiling fans.  I have lived indoors for fourty some odd years and have never managed to damage property how I have seen it damaged.  They get creative! :)

Dylan Long · Answer

I think that's some good advice Brandon. There is a lot that can be done that a new renter, even one who may treat a property poorly,  would have a hard time ruining. I think the biggest things is to try and not set yourself up for spending money twice when it can be avoided. If it needs new counters, I'd try and avoid doing a cheap counter, only to do a nice one later.

I'm a big fan of laminate wood floors, both in a rental and my personal home. It has the look, feel, and often, texture of real wood, but doesn't get the dents, scratches, etc that come with real hardwood. Even if money were not a factor, I'd take a quality laminate over full hardwood almost any day.

Buy & Hold: Do you treat the rehab like a rental or retail?

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