How much rehab is too much?

Question

Hello BP community,

For a SFR rental property, how much rehab is too much? I am reading David Greene's book on long-distance real estate investing, and he talks about buying properties in distress and rehabbing them-- "Finding the deal" as many would say. The question though, is how much money is too much for rehab costs? I've seen deal analysis examples showing rehab costs between $1,000 to $5,000. Here where I live in Portland, OR, $5,000 will only go so far in a rehab. What are the realistic rehab project(s) possible with $1,000 to $5,000 budget in the Midwest?

Thanks,

David

Shera Gregory · Answer

You also have to take into account the long term capital expenditures. The big ticket items that you don't replace now will eventually need to the repaired or replaced if you hold the property long enough. So it's more of a "pay me now or pay me later" thing and either is actually fine as long as you plan for it. I usually set aside about $125 per month per property for capex but that can go lower or higher depending on the situation. If I buy a property with a tenant in place I can't do a lot of rehab right off the bat so I put that number up closer to $200 per month and if I've just put in a new roof & hvac then I'll drop it down to about $75. So your cash flow estimates should be AFTER your set-aside for future capex.

Kenneth Garrett · Answer

@David Kuhlke

The amount of rehab is two fold and depends on your strategy.  You can just clean it up enough or fix up to a  certain standard you set.  Here is what we do for our BRRRR projects:

Buy distressed properties (cash with private lender)

Rehab is 20-30K on average

Rent it out at the top of the market

Refinance (we created forced equity)

Repeat the process

Rehabbing at a better level provides higher quality tenants and higher rents. Make sure you know your market because the ARV must appraise out.  We generally have very little money in after it is refinanced if any if we have done our numbers correctly.

Numbers still need to work on SFH must cash flow $300 per month.

Alan Pederson · Answer

Of the 3 houses I have purchased so far, we spend $3,000 on the first house just doing small stuff like light fixtures, ceiling fans, smoke detectors, and various minor repairs. The second house we spent $10,000 remodeling both bathrooms and the third house we spent about $17,000. The third one has been an ongoing battle trying to get all of the stuff the previous owner fixed, actually fixed the right way. The first house was in pretty good shape, the second one just needed the bathrooms done, and the third one is killing me... New fans, new duct work, new dryer vent, new flooring, some new cabinets, electrical work, mold damage, sheetrock and texturing, sewage pipe broke in front yard from tree root (replaced pipe), leaking faucets (replaced), etc... Every time I get a text from those tenants I cringe a little before I read it. We make good money on that house but it seems like the problems just never end.

Jeff S. · Answer

It depends on the area and the values of the surrounding homes. In Portland spending 30-60 would be reasonable for a trashed property but you could spend 200k if the area allows a total in of 200 plus the purchase price.

In the Midwest I know of a lady on BP who bought a place for 14k and put 40 into it with everything new. She does a lot of work herself and labor is cheaper. But she is all in for 54k and rents for around 850 or so. In Portland you can’t buy dirt for under 200k.