I'm looking at both duplexes and rehabs. My question is focused on the rehab arena. What is the most I should be spending on a rehab? Not in cash terms, but in percentage terms. If I find a SF home that is in need of work, does it matter how much work it needs? I'm assuming all that is important is how much profit you can make, but I wonder if there are projects with too many problems. Are these worth investing in or avoiding?
Great question. I think too many of us go into deals just looking at the gross profti, without allowing ourself a decent hourly wage for the time we spent doing the work. I have also sometimes suffered from "gottadoadealitis", and from SEVERELY UNDERESTIMATING * the amount of time required to complete a specific project.
Sometimes what looks pretty major and expensive might not be, but what looks like a golden opportunity might jump up and bite your butt.
Two personal examples, both fires. The first was one that had had a kitchen fire that appeared to have also had some major structural which scared off most others. Turned out that a few joists had some pretty major scarring, I had to "sister" onto them, everything else was "cosmetic" although the smoke penetration into the sheetrock and slab needed some heavy duty sealing to eliminate all the odor.
The second one was a fire that the seller wanted about the price of the land it was sitting on. However, since it was in the city limits the city inspector told me that since it was more than 50% destroyed it would need to be brought up to current specs. I had no problem with that, EXCEPT, that the city had increased the minimum square footage allowable from 1000 to 1200. That would have meant; NEW PLANS, NEW PIERS, NEW BEAMS, NEW ROOF LINE, etc, etc etc. The guy that bought it last Auguest is still messing around and has yet to put anything new on site.
*all cash's new rule of thumb for estimating job times-take the amount of time YOU THINK it will take to (your choice-sheetrock an entire house, re-roof, replace a bunch of copper pipe) do a job, THEN DOUBLE THAT NUMBER, so if you think 15 hours, change it to 30, then change it to the next highest measure of time, so CHANGE THE HOURS TO DAYS. So a job that you think is 15 hours, is really 30 days, a job that you think is 3 days, is 6 weeks, etc.
To avoid a re-development situation, you might look for deals where the rehab budget equals no more than 40.00% of the total cost. That figure works well for use over here in Denver. We tend to buy the cheaper house under $120,000 and generally add 15k-50k
A ballpark figure you may find useful
I really do not look at it in terms of a %age as really only care about overall cost and whatever formula I am using for that particular exit strategy.
having said that I will walk away from a home if it needs structural work or a total gutting - not because of the cost or time but because there are easier ways to make money in today's market.
In a tight market maybe - but in todays market there is no need.
So to answer your question direct - no I do not use a %age but only consider the overall cost of acquisition / holding etc....
I'm with Scott on this one...
Keep in mind that if you're not doing the renovations yourself, it really doesn't matter how much the rehab is going to cost, as the cost shouldn't impact how hard you have to work. Perhaps you'll have to hire a few more contractors and deal with a few extra scheduling headaches, but that's the easy stuff.
Personally, I try to pull myself out of the equation as much as possible (I have a full-time real estate agent and a full-time project manager on staff), so it really doesn't matter if a house needs $3K or rehab or $60K or rehab -- my job is essentially the same.
The more you can pull yourself out of the equation (by having a strong team around you), the less you should care about the extent or cost of the actual rehab.
Of course, if you're doing the rehab work yourself, that's a different story. In that case, you should be paying yourself per hour, and the more hours you need to work, the more you should be "getting paid" in total profits.
Personally, I hire a contractor. But if you are going to do the work on any project then you should get an estimate of cost and time to completion.
Then you know what has to be done and can effectively project the cost of materials and add in your time cost. This will tell you to do it your self or farm out the job.
If you limit yourself to a percentage of purchase cost, then you will not purchase a lot of the highly distressed properties. As some 100k properties can be purchased for 25K and limiting yourself to only say 50% of cost would be 12.5K for a total of 37.5K and you make (assuming sale of FMV) 62.5k.
But since you choose to limit yourself to 25% of cost you would pass up this opportunity.
Great advice on all of these responses here. I particularly agree with Frank for the fact that I know first hand about rehabbing fire damaged properties using contractors. He does too, based on the advice :)
It is very difficult to guage some kind of percentage on properties which need EXTENSIVE repair such as a fire damaged property. The main reason is that you don't know exactly what is going on behind the sheet rock and all the problems that come along with the things you cannot see with your eyes.
With fire damaged properties I can tell you from experience if it hit the sheet rock on the ceiling, just go ahead and budget for having to seal the attic COMPLETELY and OR replacing much of the framing. If you don't, usually the city inspector will eventually move you in a corner where you have to. Then again Austin is very strict with inspections, hopefully your city is somewhat lienient.
Also in regard to time budgets and cost budgets. Well, you can come up with the best budgets in the world "On Paper" but what really makes or breaks your budgets is to have effective General Contractors or Subs.. whichever you use and being able to keep them on target both with time and money. This, in my experience can be most effectively managed by
1> Hiring contractors which will not "screw you over" Easier said than done that is fir sure.
2> Having good agreements drafted with your contractors ESPECIALLY if you are not hiring a GC ((and in some cases even if you are)) bottom line is that you should prbably have elements in your contractor agreemrnts which nail down a couple of things which are......
Have clauses which penalize your contractors for going over the timelines.. which is a per day charge of xxx amount of dollars.
Also, you MUST and I cannot repeat this enough MUST have your contractors sign a "Lien Waiver" after EACH cash draw you distribute to them. I screwed up on this a few times and had mechanics liens filed for multiple properties until I got fed up and made it a part of the system. Here is the rule i think you should follow in a rehab ((maybe everyone does this, I dont know but i learned this the hard way))) Every time you write a check to a sub contractor or GC... inspect the work, pass or fail it and get it right... then BEFORE you write them a check.... have them sign a lien release waiver. It will save your ***.
When inspectors tell you something MUST be done, what I have realized is that there is negotiationg room with inspectors, and you can get questionable items on a rehab passed by approaching them as someone who is there to make THEIR job easier. This is just what I have learned after rehabbing over 12 properties. Everyone has great advice on BP. Last piece of advice is do not go waste $10k for a guru.... there are more than enough qualified people on here that are willing to give out great advice for free. =)