How much should a new investor do during a rehab?

Question

what's going on BP,

I was talking to one of my friends today (another new investor in New Orleans) and he believes that it's best to do a lot of the work during a rehab. On the other hand, I want to do as little as possible during the rehab. I'll work if I need to but I don't want another job so I'll pay a bit more to not have to work as hard. I know every person is different but do you guys have any preferences on the topic or is every house different. I know when I listen to the BP's podcasts, most of the successful investors seem to take my approach (or am I delusional?). I don't mind working hard on my 1st or 2nd rehab but I don't want it to be the norm.

Thanks in advance!

Will Chamberlin · Answer

I would agree with your approach, all things being equal. You want to get in there on the first few so you know how much work it takes to do different things. This will help know whether bids are reasonable or not for later houses. The main issue is scalability. If you try to be actively working on 5 projects at once, something will get missed. I did two houses at once in two weeks, doing most of the grunt work and subbing out floors, painting, roof, etc. and it was a massive effort to keep lists of what to do and who to call while simultaneously working to stay ahead of the next contractor. A month in and I am still trying to get the last couple things handled.

Good luck!

Mike Wood · Answer

@Brandon Clark All of my projects have been new construction, so it typically takes me more than 6 months before I am looking to do my permanent financing.  The quick refinance model is very important if your using hard money, but a bit less important if your using regular loans.  It does tie up your capital for 6 months, but not at crazy high interest rates.

Brandon Clark · Answer

@Mike Wood yes I'm familiar with the BRRRR technique. Do you have to wait 6-12 to refinance or do you have a lender that will refinance in a shorter time?

Mike Wood · Answer

@Brandon Clark What I meant by building 20-25% equity is to allow you to refinance with a conventional loan and not have to put any down payment into it.  Since conventional residential loans require 20% (SFR) to 25% (MFR) in equity (per Fannie / Freddie Mac guidelines), my goal is to build a much equity so I can get my cash out to use on other projects.  This is typically called the BRRR technique here on BP.  For me, I build new construction duplexes, so the more equity I can build into the house, the lower my required cash is required at permanent financing (i.e. I get alot of my initial cash back at my construction loan refinance).  I can then use this cash to start another project.

When I say 'paying for everything', I mean paying for the labor for other to do it.  While I pay my contractor for most of the labor to build my houses, I keep some of it for two reasons, 1) it helps me build equity as I dont pay cash for my labor and 2) its the parts I like doing.  The less you pay someone else, the more you build equity.  Alot of starting flippers definitely try and do more than they should, hoping to save money.  My first house, I fell in the same trap.  I now choose the items I want to do and make financial sense.  There are certain things that is just not worth doing yourself (roofing, sheetrock, framing, etc).

From my perspective, having done everything definitely helps you understand what it takes and cost.  That will give you knowledge to know what is a good price and what is not.  But I would never try and do everything on a house, labor is just too cheap for the grunt work.

Brandon Clark · Answer

That's what I was thinking @Jaysen Medhurst. I want to be involved but I don't want to be the primary person working on big projects. I was thinking on the 1st couple of houses maybe paint or demo or something I can't destroy.

Brandon Clark · Answer

Hey @Mike Wood, in your last paragraph, what did you mean by "you want to try and build in 20-25% equity, so you do not tie up all your capital in each project". Also, when you say "pay for everything"? Are you saying, Instead of paying a contractor for everything try to do some things on my own to save money?

Jaysen Medhurst · Answer

You're right here @Brandon Clark. Hire out the work. Unless your already a construction pro, your time is better spent finding/closing deals.

Mike Wood · Answer

@Brandon Clark I believe that unless you have your own crew (your employees), you need to be involved.  The amount of physical work you do will be dictated by your budget and how much equity you are trying to build.

For me, I stay fully involved and choice a few items that I like to do. I find contractors or subs for the rest.

Keep in mind, if you are a buy and hold investor, you want to try and build in 20-25% equity, so you do not tie up all your capital in each project.  If you pay for everything, that might be hard.  If you are a flipper, the more you pay for, the less profit it will be.

How much should a new investor do during a rehab?

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