Nearly every appealing investment property requires some level of repair or refurbishment.
Poor planning for the work that needs to be done after closing can lead to unexpected costs and prolonged vacancy that turn a “great opportunity” into a painful lesson.
The lesson can be particularly difficult to handle when cash reserves are low, forcing creative financing or credit card balances that can cripple your return on investment.
The worse the property’s condition, the more care and planning is required to avoid this nightmare situation.
How to Analyze a Real Estate Deal
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
When Should You Start Preparing?
The planning process should begin long before signing the closing documents. The smart investor begins planning for repairs and rehab as soon as information is available about the condition of a prospective property, whether through the listing, a showing, or an inquiry to the seller.
If you are serious about the property, make a list of all deficiencies and tally the estimated cost to bring the property to the desired condition prior to making an offer.
Depending on your strategy, this could be the minimum “rentable” condition, a fully upgraded living space that will command greater rents, or anywhere in between. This tally will be immediately used in your spreadsheet or calculator to determine if the investment is worth your time.
After an offer has been accepted, the real planning begins. This is when you want to get more detailed information about the work that will be done immediately following closing.
While you are performing due diligence (inspections, reviewing documentation, etc.), you should have all aspects of the job quoted, not only for cost but for completion date. Remember that time is money when you are fixing up a property for rent.
Why You Should Be Preparing
On an $800 rental, every week of delay is costing you about $200 (plus the cost of any utilities that a renter would otherwise be paying), which means that if you can get it done a week sooner by paying an extra $100 you are actually saving $100 in the end!
The information from your quotes gives you a more complete picture of your upfront costs. Add this to your closing costs, down payment, and any other cash you will be contributing to determine if it is still wise to go through with the investment.
If you plan to do the rehab or repair work yourself, be realistic about the time it is going to take to complete the job.
If you work 9-5 and only have time on weekends to do the job, can you really get it done in one weekend? If not, you are losing an entire week of rent for every weekend it slips, and as I mentioned before this translates to significant money. A tradeoff between doing it yourself and hiring a dedicated team to get it done sooner may be in order.
During inspection, additional problems may be uncovered. These can be as simple as burnt out light bulbs and as major as electrical, plumbing, roof, or air conditioning issues. Sometimes these findings can be used in negotiations with the seller, but otherwise they will be added to your final cost.
At this point, it is important to make a rational decision about the merit of the property.
Since you have already sunk some effort and cash into the inspection(s), having high hopes that you will soon be raking it in, you may be emotionally invested. Suppress your emotions, channel your investor’s logic, and make the choice you know is right. The last thing you want to do is make a decision that you and your bank account are going to regret.
An Example From One of my Properties
In 2011, I purchased a foreclosed town home that needed a lot of love.
Previous buyers had backed out when they found that the A/C unit needed replacement and the stove was broken. Going in, I understood that I would be spending upwards of $10k for the rehab, and I was willing to do some of the work myself.
The numbers still looked attractive, and nothing else major showed up in the inspection, so I went ahead with the deal. By the time it closed I had the new A/C quoted, a flooring company scheduled, a handyman lined up for some minor electrical work, and an appliance package picked out that would upgrade the kitchen, the focal point of the living area, from dated to modern.
As soon as the keys were in my hands, I drove the 2.5 hours from my home to open up the property and direct traffic. While I handled appointments, I got busy installing fans, patching walls and touching up paint, repairing a chipped kitchen sink, adding a door to a bedroom closet, and cleaning up the small patio area.
Doing all of these things in parallel saved a great deal of time, and since I was going to be on site dealing with appointments anyway, it proved very efficient and cost effective to do some of the easier work myself.
Though there were successes in this project, there were also lessons learned. My realtor thought it would be worthwhile and harmless to put it up for rent immediately, even while all of the work was going on.
A couple of people stopped in while we worked, and it did not go well. They were stepping over old carpet, could barely look into the kitchen with appliances pulled into the center of the room, and I got the sense that there was zero interest in signing a lease while the property was in this shape.
After all, how could they be sure that the finishing touches would be in place by the time their lease began? And who would be excited about living in a home after seeing its ugliness exposed?
I also learned to pad any estimate for rehab completion. I thought I could get everything done in a single weekend, but inevitably new challenges arise and the project took slightly longer, leading to a second trip the following weekend to take care of the finishing touches.
Plan ahead for renovations and repairs on your next investment, and make sure your contractors understand the urgency to complete the job and put the property on the market. Proper planning will save time, money, and stress in the end, and is time well spent in the beginning.