First rehabs approaching - what do I need to do first?

Rehabbing & House Flipping
11yFollow

First rehabs approaching - what do I need to do first?

Christina R.
Investor · DMV Maryland · Member since 2013 · 867 posts · 370 votes

I'm getting ready to do a "2-fer" and, with a partner, rehab two homes for rentals.  My partner is experienced and I intend to ask him the same question I'm asking here (and I know he will thoroughly educate me which one of the many benefits of partnership)  but thought I'd open it up to the BP nation to get all responses (which are most appreciated).

This will be my first rehabbing experience.  Excited and nauseous at the same time . . . lol

These properties are literally a block apart  & we hope to scale our resources and rehab them simultaneously.  We have our partnership structure sorted out.  We have our exit after rehabs worked out.  It's all the million things in between that make my head swim  . . . so as a newbie to this phase of this type of investing....

what  do I  do next?  I mean this in terms of -

* tax prep - what do I need to get in front now  before we take title that helps me at tax time next year?

* software or spreadsheets that will help track expenses - what do people suggest (I'm not a techy and don't have time to create something from scratch)

* chain-of-custody on working with contractors i.e., paperwork, documentation, etc.

* at what stage do we hook up with property management and aligning all that so we can rent out as soon as feasible after finishing the rehabs?  Does this strategy differ at all if we are using govt funded tenant programs?

* builders risk insurance . . .

* 

* I will be holding these in my name as t-in- co n title after we refi out. . . .ironically I received an umbrella policy as from our car insurance agent yesterday . . .what is a recommended amount to hold?  

And a million other things I just can't pull up from my brain.  I searched a little on the engine - I'm hoping someone can paste up a thread link that encompasses a lot of these questions.

thnx in advance

2Reply
141 views

Most Popular Reply

J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
11y

First, these sound like big rehabs, so make sure you're working with someone you trust and who has done at least a couple rehabs in the past...  :-)

Regarding your specific questions:

-  In terms of tax prep, there's not much you can do if you'll be holding in your name personally (which you need to do if you'll be getting a FNMA loan);

-  In terms of spreadsheets for tracking expenses and scope of work, I'd let your partner handle that, since he has experience with rehabbing

-  Likewise in terms of documentation, contracts, etc. -- let your partner take the lead

-  I would get in touch with the PM as soon as you start the rehab.  That should give him plenty of time to be ready to fill the units as soon as they are ready.  Though, in reality, they'd probably be just as prepared if you called them just a couple days before the units were ready to go on the market

-  As for builder's risk, if your partner has done rehabs before, he'll have an insurance company that he uses

And, for the record, I don't mind you telling people that we're partnering on these...  :-)

Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)
5Reply
See this reply in the discussion

49 Replies

Jump to latestLatest
  • Derek Lacy
    Insurance Agent · Maitland, FL · Member since 2015 · 397 posts · 244 votes
    11y

    You are correct in builders risk insurance.  Do realize that it will only cover you while construction activities are on-going and certainly never after occupancy.  There is no clear cut rule on this, as a builder risk policy does not have a standard policy language, so always read your policy.  Ask questions of the broker on the policy, and do not hesitate to ask for a sample copy of the policy so you can review the cancellation clause. 

    We have a great nationwide market for builders risk, so if your preferred agent cannot help do let us know, we would love to help. 

    As far as your umbrella liability from your car insurance agent...  Probably not going to help you here.  That is most likely a personal umbrella, and this is a business venture (specifically excluded by the underlying policy), so you may want to look into General Liability.  Depending on your state you may have a work comp issue too.  Meaning they may view you as the general contractor (remember this is by old laws written in the 20's and 30's) and you may be ultimately responsible for any worker injury if not otherwise covered.

    Good luck, I hope the other house flippers can give you more advice, I'm a hold investor and insurance agent.

    0Reply
  • NA Jones
    Flipper · Port Deposit, MD · Member since 2014 · 280 posts · 171 votes
    11y

    Congrats on your first rehab! :)

    1Reply
  • Michael J.
    Rental Property Investor · Louisville, KY · Member since 2008 · 342 posts · 123 votes
    11y

    Congratulations! It sounds like you are well on your way. If you haven't already I would suggest reading J Scott's The Book on Flipping Houses. Even for rental rehabs there is a lot of good info in the book.

    One thing to consider is don't over do it if it is a rental, similar grade retail and rental rehabs should be different in a lot of ways.

    0Reply
  • Christina R.
    OP
    Investor · DMV Maryland · Member since 2013 · 867 posts · 370 votes
    11y

    @Derek Lacy 

     thanks for those tips, I need to dig in further.  I'll be taking title in my name in-common and holding in my name-in common (these will be held for rentals, we will refi out after work is done/our holding period is complete)... so the fact that at least I will be holding in my name still would fall under general and not personal liability?  

    @Michael J. 

     I have @J Scott 's book and yes, awesome book and I actually I can't imagine doing this project without it...   This will end up being a Section 8 route as rents in this area are so much higher on a govt program and Baltimore tenants on assistance for housing can be very picky.. we've looked at some rehabs in the area to see what the standards are, fortunate to have the opportunity to have that look-see prior because it really helps with estimating what level is needed to attract tenants.

    0Reply
  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    11y

    First, these sound like big rehabs, so make sure you're working with someone you trust and who has done at least a couple rehabs in the past...  :-)

    Regarding your specific questions:

    -  In terms of tax prep, there's not much you can do if you'll be holding in your name personally (which you need to do if you'll be getting a FNMA loan);

    -  In terms of spreadsheets for tracking expenses and scope of work, I'd let your partner handle that, since he has experience with rehabbing

    -  Likewise in terms of documentation, contracts, etc. -- let your partner take the lead

    -  I would get in touch with the PM as soon as you start the rehab.  That should give him plenty of time to be ready to fill the units as soon as they are ready.  Though, in reality, they'd probably be just as prepared if you called them just a couple days before the units were ready to go on the market

    -  As for builder's risk, if your partner has done rehabs before, he'll have an insurance company that he uses

    And, for the record, I don't mind you telling people that we're partnering on these...  :-)

    Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)
    5Reply
  • Account Closed
    Investor · Baltimore, MD · Member since 2014 · 1k+ posts · 688 votes
    11y
    Im very apprehensive about long term partnerships in rentals. If i were you, i would worry constantly about a partner knowledgable about rehabbing costs while i was not. That partner could easily up labor costs and pocket them without you being any the wiser. U need to know appropriate costs for what you're doing and not take anyones word for it. Keep in mind appropriate is a relative term, your partner could be paying half the labor he's claiming, and the claim could still be "appropriate". Also, even if you don't have to lay out a dime for rehab, your partner would still get that claimed money returned at the refi. Be cautious and learn what something can actually be done for before agreeing to anything.
    0Reply
  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    11y
    Originally posted by @J Scott:

    First, these sound like big rehabs, so make sure you're working with someone you trust and who has done at least a couple rehabs in the past...  :-)

     I know that area pretty well @Christina R.  I bet I know who you are partnering with and I would be very very careful

    I wouldn't trust that to a partner, especially that scoundrel. I would have the seller draw up the contract. You can always trust sellers.

    Both @Denise Uhrin and @Account Closed do tenant placement and you know they own property there.

    And, for the record, I don't mind you telling people that we're partnering on these... :-)

    Ooops I take back everything I said. !

    2Reply
  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    11y
    Originally posted by @Account Closed:

    Im very apprehensive about long term partnerships in rentals. If i were you, i would worry constantly about a partner knowledgable about rehabbing costs while i was not. That partner could easily up labor costs and pocket them without you being any the wiser. U need to know appropriate costs for what you're doing and not take anyones word for it. Keep in mind appropriate is a relative term, your partner could be paying half the labor he's claiming, and the claim could still be "appropriate". Also, even if you don't have to lay out a dime for rehab, your partner would still get that claimed money returned at the refi. Be cautious and learn what something can actually be done for before agreeing to anything.

    I completely agree with everything you said above.  I think partnerships, when just starting out, are typically a very bad idea -- either neither side knows what's going on (in which case things go doubly wrong) or only one side knows what's going on (in which case the other side can get taken advantage of).  Partnerships are -- in my opinion -- best left to more experienced investors who know what they want, know what they need, and most importantly, know what they don't want or need.

    Of course, there are going to be some (rare) exceptions.  The most obvious would be when partnership is an extension of a mentoring relationship.  In this particular case, I'm the partner and Christina and I have been working together for a while...if she had to worry about me being unethical, I'm guessing there are a few dozen people here on BP I've partnered with in the past who are now reading this and will warn her...  :-)

    More importantly, my goal is for HER to learn the rehabbing side of things so that we can partner on 50 more deals and she can be the one dealing with the budgets and schedules...and I'm the one who can be concerned about HER padding the budgets...  :-)

    Never thought I'd be buying lots of rentals in the city...this should be fun!

    Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)
    3Reply
  • Account Closed
    Investor · Baltimore, MD · Member since 2014 · 1k+ posts · 688 votes
    11y
    Originally posted by @J Scott:
    Originally posted by @Account Closed:

    Im very apprehensive about long term partnerships in rentals. If i were you, i would worry constantly about a partner knowledgable about rehabbing costs while i was not. That partner could easily up labor costs and pocket them without you being any the wiser. U need to know appropriate costs for what you're doing and not take anyones word for it. Keep in mind appropriate is a relative term, your partner could be paying half the labor he's claiming, and the claim could still be "appropriate". Also, even if you don't have to lay out a dime for rehab, your partner would still get that claimed money returned at the refi. Be cautious and learn what something can actually be done for before agreeing to anything.

    Never thought I'd be buying lots of rentals in the city...this should be fun!

    Wonderful dealing with baltimore city in all its forms. Welcome to the jungle. Why a partner? She might but certainly you dont need it from rhe outside looking in. Why share and deal with a second marriage? U know rehabbing, can get a pm to rent/manage...easily if youre doing something nice, u have connections to any other info u need, have cash...or atleast connections to get it, probably can finance without issue.....why bother? 

    0Reply
  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    11y
    Originally posted by @Account Closed:
    Wonderful dealing with baltimore city in all its forms. Welcome to the jungle. Why a partner? She might but certainly you dont need it from rhe outside looking in. Why share and deal with a second marriage? U know rehabbing, can get a pm to rent/manage...easily if youre doing something nice, u have connections to any other info u need, have cash...or atleast connections to get it, probably can finance without issue.....why bother? 

    Because she found the two deals...she's the one letting me partner with her, not the other way around...  :-)

    I personally love partnerships where each side can bring something the other side can't.  And given how it's getting more difficult to find great deals these days, someone who can bring deals is definitely someone I'm happy to partner with...

    Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)
    4Reply
  • Andy Gross
    Baltimore, MD · Member since 2014 · 145 posts · 65 votes
    11y

    @J Scott   are you going to write about these on your website?

    @Christina R. , if J doesn't, would you mind doing a write-up? I ask because I am really curious about how these rehabs for rentals work out. When flipping to retail, a new kitchen (cabinets, counters, appliances and lighting) can easily run $20k+, installed, but lots of these rentals in Baltimore seem to wind up being under $50k, all in. Obviously you aren't putting stainless/granite in the lower end rentals, but still, even assuming good mechanicals, a new kitchen, bath, misc. repairs, still has to be expensive, especially if there is lead paint to contend with.

    0Reply
  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    11y
    Originally posted by @Andy Gross:

    @J Scott   are you going to write about these on your website?

    Since I'm getting ready to start building a portfolio of rentals, I've been considering reviving the website to document all our deals -- these would be two of the first three that I would document.  Even if I don't have the energy to revive the website, I'll at least post some details here, since this is another deal that will involve three or four BP folks throughout the process...

    That said, the basic numbers for the two properties are:

    -  Purchase in the $10-20K range (one closer to $10K, the other closer to $20K)

    -  Full gut rehab in the $30-40K range  (one closer to $30K, the other closer to $40K)

    -  All in (purchase + rehab) on each for $50-60K

    -  Rent Section 8 -- one at $1100-1150 and the other at $1300-1350

    There is another investor who owns literally about half the street (I believe 7 of the other houses), and we've seen a couple of his rehabs.  So we're pretty confident we know exactly what the market rents will be assuming we do a full rehab.

    Between the 2 properties, we should generate about $2400/month on a $110K investment. And will likely refi much of the cash out into 30-year conventional loans. So, CoC will be in the 25-35%, depending on what they appraise for.

    Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)
    0Reply
  • Andy Gross
    Baltimore, MD · Member since 2014 · 145 posts · 65 votes
    11y

    @J Scott 

    Those numbers look great. From my limited experience in remodeling, the rehab numbers seem very, very reasonable. Are these long-term contractors you are working with, and thus getting/negotiating lower rates, or are these retail prices? And when you say "gut" rehab, I'm assuming these aren't the typical Baltimore City shell that has three walls and half a roof, right? Are you taking the walls down to the frames?

    Hope I'm not asking too many questions. I'm just trying to wrap my head around your deal. I hope to purchase my first rental at the end of next year and trying to accumulate as much knowledge as possible.

    0Reply
  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    11y
    Originally posted by @Andy Gross:
    Those numbers look great. From my limited experience in remodeling, the rehab numbers seem very, very reasonable. Are these long-term contractors you are working with, and thus getting/negotiating lower rates, or are these retail prices? And when you say "gut" rehab, I'm assuming these aren't the typical Baltimore City shell that has three walls and half a roof, right? Are you taking the walls down to the frames?

    No long-term contractors.  I've done a couple rehabs in this area, and have yet to find any contractors I like enough to use again.  So, I'll be scouting new contractors for both of these rehabs.  They'll be "investor friendly," but likely nobody I've used in the past.

    For the most part, this is what we'll be doing to both of them (with estimated budgets):

    -  Lead inspections/clean-out/permits:  $1000

    -  New plumbing (and new fixtures):  $6000

    -  Upgraded electrical (and new fixtures):  $5000

    -  Install forced air heating/AC (ductwork and units):  $7000

    -  About 50% new sheetrock and paint:  $5000

    -  Flooring: $2000

    -  Cabinets/countertops:  $4000

    -  Replace doors/trim as needed:  $2000

    -  Appliances:  $1000

    -  Exterior repairs as needed (doors/windows/etc): $3000

    -  Misc:  $1000

    TOTAL:  $37,000 +/-

    I've done literally a 50-100 rehabs of this exact scope, though I've never done one for a rental unit.  But, assuming there are no major surprises, I'm pretty confident that numbers will be in that ballpark.

    Purchase is $32,500 (between the two), I imagine closing expenses will be about $3500, so if we can hit the $37K average rehab, we'll be all-in at $110K.  Even if we're over $5K on each rehab, and are all-in at $120K, we should hit the 2% rule.  

    So, worst case, we're at 12% CoC all-cash, about 30% CoC with a FNMA loan and about 20% CoC with a portfolio loan.

    Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)
    1Reply
  • Andy Gross
    Baltimore, MD · Member since 2014 · 145 posts · 65 votes
    11y

    Thanks for the breakdown! The difference between this rehab, and one for retail, must be in the finishes/materials. After reading through your website, it's clear that your $1000 budget for appliances wouldn't go far if you were flipping to sell to retail.

    0Reply
  • Nancy Roth
    Investor · Washington, Washington D.C. · Member since 2012 · 239 posts · 168 votes
    11y

    @J Scott

    I'd like to know if you are confident you can get a refi. 

    In many neighborhoods in Baltimore, including the one you are working in, it's very hard to get an appraisal that comes back with a value commensurate to the amount you want to borrow, which should equal what you spent on the property, both in acquisition and rehab. 

    That's because few if any owner-occupants buy in these communities at after-rehab value. Therefore the price you, the investor, paid ($10-$20K) is the only benchmark the appraiser has in constructing the comparable market analysis for the lender. 

    Last year I had a deal fail because of an appraisal that failed to take into account the total rehab done in a rental unit in downtown Baltimore. Rental investors complain all the time about the difficulties they encounter in financing out of their properties.

    So if you know of a way to get around this problem I certainly hope you'll share it.

    Also you mentioned an FNMA loan. Would FNMA refinance a rental property? They phased out their investor loans last October, and I thought they were only lending to owner-occupants now. Would love to hear otherwise.

    Thanks,

    Nancy Roth

    1Reply
  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    11y
    Originally posted by @Andy Gross:

    Thanks for the breakdown! The difference between this rehab, and one for retail, must be in the finishes/materials. After reading through your website, it's clear that your $1000 budget for appliances wouldn't go far if you were flipping to sell to retail.

     Yup, the big differences between this budget for these rehabs and if we were doing a retail flip are:

    - Appliances (would be about $1500 more)

    - Cabinets/Countertops (would be about $2000 more)

    - Plumbing (would be about $500 more for nicer fixtures)

    - Electrical (would be about $1000 more for nicer fixtures)

    - Doors/Trim (would be about $1000 more for nicer materials)

    - Flooring (would be about $1000 more for nicer materials)

    Which, as a retail flip would put us around $44K, which is right in line with what we spent on a similar house (but retail flip) about a mile away a couple months ago...


    Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)
    0Reply
  • Christina R.
    OP
    Investor · DMV Maryland · Member since 2013 · 867 posts · 370 votes
    11y

    It was a busy day back at the old schoolhouse (literally), but I don't feel I can turn in for the night until I respond to some of this thread from the last time I was on BP ...and I'm just gonna start tagging people...

    @J Scott 

     Thanks for giving me the opportunity to learn from a master of the field.  @Account Closed 

    - Nothing in life is certain but I have been speaking with our lender, who has worked with my husband and myself for years on our personal homes, for over a year on this type of scenario as previously two Novembers ago I was going for a purchase to rehab and then refi to hold it as a rental. Purchase and rehab with hard money, then refi out into a conventional. Well, that ended up going nowhere because no HML was lending on rentals but the refinancing aspect was not the issue. So we're hoping to do conventional for best terms/rates but will go with what will work.

    3Reply
  • Bill Coleman
    Real Estate Investor · Westminster, CO · Member since 2014 · 201 posts · 74 votes
    11y

    I gotta say, I did the same thing - 2 properties at once a couple blocks from each other and I will never do it again. I thought that I would have an economy of scale and save on costs. Not so. It just complicated the jobs beyond belief and slowed everything down. 

    One thing I would have done differently was hire two different contractors for the properties. They would have been done much better and probably for less money.

    0Reply
  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    11y
    Originally posted by @Bill Coleman:

    I gotta say, I did the same thing - 2 properties at once a couple blocks from each other and I will never do it again. I thought that I would have an economy of scale and save on costs. Not so. It just complicated the jobs beyond belief and slowed everything down. 

    One thing I would have done differently was hire two different contractors for the properties. They would have been done much better and probably for less money.

    Each investor will no doubt have their own experience and preferences, but given that we typically have between two and six projects going at once, we've had to figure out how to get contractors to work serially on multiple projects.  Trying to do each project with separate crews would create a tremendous amount of management overhead, not to mention the difficult of finding several different contractors in each trade that I wanted to work with -- it just wouldn't be feasible.

    Add in the monetary benefits of using contractors serially on projects, and I really couldn't imagine doing it any other way.

    But again, that's just my experience/preference...I know others who prefer to have multiple crews, even for a small number of projects.

    Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)
    0Reply
  • Don Hines
    Investor · Little Rock, AR · Member since 2010 · 628 posts · 251 votes
    11y

    @Christina R. 

    All of the "My money and their experience" deals have never worked out. But, I think you have hit it out of the park with @J Scott as a partner.

    Congrats!!

    Don

    2Reply
  • Bill Coleman
    Real Estate Investor · Westminster, CO · Member since 2014 · 201 posts · 74 votes
    11y

    It will also depend on how hot your market is. My market is so hot in Denver that it's really hard to schedule contractors and subs. This delayed the project by a month. 

    0Reply
  • NA Jones
    Flipper · Port Deposit, MD · Member since 2014 · 280 posts · 171 votes
    11y

    Gotta be cool to be able to say you are flipping with the guy who literally wrote THE book on flipping! ;)

    1Reply
  • Jessica H.Pro Member
    Flipper/Rehabber · Easton, PA · Member since 2013 · 224 posts · 36 votes
    11y
    Best of luck on your new venture together! Christina, you'll do great- learning by doing is the best and you have one of the best by your side!
    1Reply
  • Jessica H.Pro Member
    Flipper/Rehabber · Easton, PA · Member since 2013 · 224 posts · 36 votes
    11y
    Best of luck on your new venture together! Christina, you'll do great- learning by doing is the best and you have one of the best by your side! Btw how are you finding your deals?
    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free