How to decide between a renovation, gut rehab, and rebuild?

Question

Hello, I am a newbie at real estate investing... I bought a 2 flat in Chicago in an up and coming neighborhood (Logan/Avondale area) about 10 yrs ago. Newbie because I bought it as a primary home at first, but now want to turn it into a 100% investment and rent it out fully.

I have lived in the property since then (just moved out), and was renting the garden unit to a friend for most of the time. During that time, the neighborhood has become a hot place to live however, the house is really old (over 100 yrs old) and recently had a flood in the garden unit that destroyed the kitchen. Anyways, over the years I have seen properties on my block get bought, tore down and rebuilt making the neighborhood look really nice. Currently there is a 2 bedroom garden unit, a 3 bedroom first floor unit, and an attic that I would like to turn into a studio if possible.

I was looking for some advice on how do I determine whether I should do a regular renovation, do a gut rehab, or do a full tear down and rebuild? Most newer places are open concept, while mine is not.  I would like to add that the house has a lot of equity built in (doubled the price in 10yrs), but I want to refinance after I renovate so that I can purchase another real estate investment property, and increase my portfolio (BRRRR). I plan on using a combination of savings, and a rehab loan to get this project financed. Any advice would be greatly appreciated!

Jonathan Satizabal · Answer

I would suggest doing a quality rehab and updating the layout or just selling it. Think about duplexing up to the attic instead of adding a unit. But look at what the places are renting for and see what makes sense.

Make sure that you take care of the flooding in the basement. If the sewer line backed up you can add a Flood Control system they run about 8-9k I have this on a couple of properties and they work really well. It's basically a check valve with a sump to move water around the valve.

Instead of getting a construction loan look into a Heloc. You should have got one before you moved out but you may still be able to get one. I think Huntington bank will give you a Heloc on one investment property. When you are done with the rehab you can refinance it into one loan.

I would stay away from a complete tear down. Since you are anew investor, you probably want to tackle some smaller projects before taking that on. Try to keep it simple, make a construction budget and work schedule.

On a side note, Create a Bid Form that you hand out to contractors when they are giving you estimates.

You want to see who their sub contractors are, if they're licensed and have insurance. Personally I don't care if they have a license or insurance. But contractors will take your money and hand over an entire project to one guy that claims he can do everything. I want to see a plumber, electrician, tile guy, a painter, drywaller, HVAC and carpenter. Preferably two subs for each trade this will let you know that they have additional resources at their disposal.

Get the quotes itemized this way you can pull items off their list and hire your own subs, but make sure that they understand this. You can have them break it down further into labor and materials.

Take the time to plan out the project before you get started. It might feel like you're moving too slow at first but it will pay off.

Henry Lazerow · Answer

Avondale is a great area! I would recommend cosmetic rehab if possible, this tends to provide the highest ROI especially when you are hiring out a third party GC to run the gut rehab who marks up the price. For a simple cosmetic rehab you can hire contractors yourself and there is a lot less to go wrong. What to do: Quartz kitchens, white cabinets, white tile, stainless appliances and vinyl floor is really all you need to rent for high prices/brrr. This is what I did for my 4 unit and ended up being able to refi out over 100% of what had in the property.

Jonathan Klemm · Answer

@Christian Silva - I think you just need to fully evaluate the numbers and figure out what the after repair value is for the different scenarios and then get a rough idea on how much each scenario will cost.  Given you want to refi you'll need 20% equity on the backend and still need to be cash flowing when you are done.

I personally always lead to heavy rehab but that's simply because I am always thinking long-term and big picture cap ex expenses that get significantly reduced for a number of years after a heavy rehab.

If your building is quite old which it sounds like it is.  When you start pulling permits the city will want all the main items updated like the plumbing and electrical, which is a good thing assuming you have the funds.

John Warren · Answer

@Christian Silva the one thing to think about here is how much work a substantial renovation or gut rehab really is and how much risk is involved. I am not a big fan of this strategy unless you have your team in place. When you are talking about opening up a 100 year old building you will most likely get into structural and framing issues that you didn't imagine, and you also will spend a small fortune with how much building costs have gone up.

Why not look to simply sell since you have had it as your primary residence for 2 of the last 5 years? You can trade the equity into something else, and you can also avoid the big tax hit you would have had if it was a pure investment.

Jonathan Satizabal · Answer

@Christian Silva, I like the duplex idea for three reasons.

1. There are not a lot of duplexed rentals in Chicago and definitely not in Logan Square. So as far as market-ability it should be a really nice feature.

2.It should help your re-sale value also, since you would attract more live in owners than investors. Check the comps though to see what might make more sense.

3. Zoning requirements. I am assuming that your property is zoned RS-3 which is for single fam and 2 unit properties. Permitting could be tough if you're adding a unit.

I can send over a bid form that we use at my w-2 Job. After my last rehab I realized it might make sense to get some more information from contractors. It's similar to an application for a tenant you're just asking for some basic information and it shows that they've put some thought into the project and didn't just throw out a number. I still need to make one up for myself that's more geared towards residential projects.

Christian Silva · Answer

Thank you guys for all the feedback!  I think I will probably explore both routes and see which one makes most sense after running the numbers.  I definitely want to open up the floor plan a bit regardless on if I do a full rehab or a lighter renovation at least on the first floor unit.  I was thinking that adding a studio unit would generate more cash flow because that's another monthly rent to collect but maybe duplexing will make more sense with the initial cost.  Not sure at this time...and you are correct the house is in RS-3 zone so not use if it is even feasible to add a legal unit in the attic.

I'm getting the first bid this weekend.  Wish me luck!!!  Also does anyone have recommendations for contractors?  Any tips on finding contractors? @Jonathan Klemm do you do this type of rehab jobs?  If you do, lets connect.

Robert Andersen · Answer

The first property I bought needed a partial rehab. Opening up walls is risky because you're going to find all the handyman work that the previous landlord or contractor did. A lot of work won't be up to code and you're always going to go over budget. I would not attempt this unless you're also very handy and can take on a few projects of your own.

A lot of it also depends on how far you go with the rehab. A lot of people only do cosmetic rehabs where they replace the kitchen/bathroom and refinish the floors. This isn't very expensive.

If you're talking about removing all the walls and replacing the plaster with drywall, all new trim and new floors/sub floor you're going to run into a lot of unforeseen problems.

You also have to be careful about who you hire. A lot of contractors do subpar work if you're not there to watch them. They get paid by the job so the main priority is getting it done. That doesn't mean getting it done right. They''ll nail a subfloor down instead of screwing it to save a few dollars and time. A few days to weeks later you'll noticing it squeaking.

How's the plumbing? has it ever been replaced or upgraded? copper pipes?

What about electrical? Have the panels/service been upgraded to something more modern?

What about heat/air conditioning. Do you plan on removing the central boiler and replacing it with in-unit heat/ac?

Henry Lazerow · Answer

I did it in my 4 unit and it worked for 110% cash out. Refinishing the hardwood looks better but vinyl is so quick. If was really really high end definitely re-finish but for the “modern rental” tier vinyl is fine.

Joe Mende · Answer

Henry, you've been doing luxury vinyl in place of real hardwood and not losing any value?  If, so, that's amazing!  I'm always skeptical about that, unless it's in the basement.  But, you're the professional..not me!

Jonathan Klemm · Answer

@Christian Silva - Usually the best contractors you find come referrals and typically pretty busy.  Just know no matter what the case......rehab/construction will always cost more and take longer than you expect......always haha

We should definitely connect and see if your project is a good fit.  Feel free to shoot me a PM.

How to decide between a renovation, gut rehab, and rebuild?

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