1. What is your thought process when looking at a distressed property? What do you start looking for?
When walking a distressed property, always look for the major capital expenditures. Roof, siding, windows, foundation, HVAC, water intrusion, mold, plumbing, electric. If the tenant/owner is not home, I will turn the water on full blast and flush toilets to see if there is any sewage issue. A lot of times, they are home you just have to observe any potential signs of water backing up.
2. How do you determine the estimated repair/rehab costs before purchasing the property? Is there a rule of thumb?
My general rule of thumb is a conservative estimate to determine the level of rehab.
1. Cleanout and touchup - $10-15 per sqft
2. Paint Carpet + 1, $20-25 per sqft
3. Light Remodel, appliances +1-2, $30-40 per sqft
4. Heavy remodel, +1-2-3, 50+ per sqft
If the numbers work, I'll pay a contractor to walk it and give me a more accurate rehab estimate. It's not worth me paying a contractor if my rough estimate isn't even close.
3. What hidden and important information do I need to know and research before investing in a property (hidden expenses, potential issues, etc)?
Code violations, hidden water or fire damage, unpermitted additions, mechanics liens (title company will tell you), encroachments + easements,
The BRRRR strategy has glorified finding a dilapidated property, fixing it up and refinancing your money out. The problem in an inflated market is people aren't buying right. They overpay at the beginning, do the necessary repairs, and then can only refinance out 80% of the capital they have into the project. At that point, why not just buy a turnkey property and save the time? As the market shifts, sellers are still asking over market value for their houses, leaving no margin for rehab. Until sellers come to terms that their houses are losing value, you are going to want to be careful to not overpay.
