Properties that are in need of a major rehab can be some real money makers. Over the years I have learned that the worse the property’s condition, the better the deal usually is and the better the profit will likely be. The reason these properties can be such a good deal is simply because there is so much work to be done. They are a major undertaking.
What do I mean by major? Usually these are properties that have had a major event, such as a fire or flood, that caused widespread damage. Or they may be properties that have sat vacant, vandalized and unmaintained for many, many years. These projects do not entail just slapping some paint on the walls and replacing carpet. Major rehabs can easily run into six figures and are often quite complicated and involved. They are not going to be finished in a couple of weeks. Rather, there are several stages that have to be worked through.
In this post I want to go through those stages and outline what you, the investor, need to do to see the project through to completion. Even if you have a general contractor, it is best if you remain involved in the project and be available to make decisions and keep things moving along.
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.
The 6 Fundamental Stages of Any Major Rehab Project
The first task is to make a list of what needs to be done. You can and should use the estimates from your inspection checklist that I discussed previously. Do any of the major systems need to be upgraded/replaced/installed? Do windows need replacing? What about drywall and trim work? Will the kitchen and baths need major upgrades? What about the floors — what will you cover them with? Will you be adding any features outside, such as a deck, fence or driveway?
One thing to understand is that all of the repairs and renovations cannot be done at once, and some things actually need to come before others. You need your major systems in place first. Often it is wise to get the electrical done, then plumbing, mechanical and HVAC. All of the major systems should be “roughed in” or pretty much installed before you start adding any finishing touches like drywall, woodwork and flooring.
Ask your contractors how long it will take them to complete these various tasks. Also ask them if they need anything else from any of the other trades to complete their work. For example, an HVAC installer may need a plumber to run a natural gas line or a condensation line. You need to be sure all of this is organized into a time schedule and to have a timeline for completion.
Now is your chance to update and improve the property to make it more appealing and bring it up to modern standards. This is the time you should think about open floor plans, bigger baths, and larger and more convenient laundry areas. Now is the time to lay out an awesome kitchen or a back deck. More lighting and space for all of our modern electronic gadgets can also be very appealing. Don’t be afraid to move or remove a wall or two to open something up or make a room larger and more functional. You may even decide to build an addition. This second step is often done in conjunction with step one, as plumbing or electrical systems may need to be rearranged or upgraded.
Once you have organized your rehab project and laid out a basic design, it is time to get the systems in. This means running wires, pipes and ducts through the property. This is the messiest stage of the rehab process, and your contractors will likely be ripping things apart, sawing or cutting holes in everything and basically getting in each other’s way. It can be really tricky to get some of these systems in place, especially in older houses.
Make yourself available to ensure that things don’t get in the way or put out of place. Many contractors are blind to what others are doing, even if you make them aware. For example, I have had HVAC crews try to install a duct and vent directly in front of a toilet where one would sit or stand. That simply was not going to work, and they did it that way because it was the easiest way for them to install the vent. If I was not there to tell them to crawl under there and move it, it would have been a problem later on. Things such as this will happen more often than you realize.
Frame It Up
Once you get your systems in place, you can begin to frame everything up and trim everything out. Again, this is often not an easy task. Getting drywall to look smooth and finished is a skill and an art. A good drywall crew and skilled carpenter is a must here. Keep an eye on the trim work, as it can get tricky to put together when it goes around corners, joins other rooms or intersects with stairs or other woodwork. If it looks funky, make them tear it off and try again.
This is perhaps the most important step in your project. It is what people will actually see and touch when looking to rent or buy the property. Sure, you might have spent thousands on new and improved electrical and plumbing systems, but people do not generally care about that. They do care that the paint matches the countertops. This is where your good taste and design skills come into play. The trick here is to get all of your finishes, colors and designs to fit together. And believe me, it is no easy task. There are literally hundreds of questions to be answered.
- What colors should you paint?
- What about the trim? Should it be the same color in every room?
- What vanities, sinks and mirrors should be used?
- How about plumbing fixtures? Should they be polished chrome, brushed nickel or something else?
- What about light fixtures?
- How about the kitchen cabinets and counters?
- Do the tile and floor stain match?
As you can see, there are a lot of things to bring together and coordinate. It is not something that can generally be done or learned over night.
To learn and get ideas, I like to look through various magazines, like Architectural Digest and Better Homes and Gardens, to see what the latest trends are. Also, browse through your local big box stores and ask what the most popular items are. Use as many samples as you can. Get opinions from friends and contractors, and don’t be afraid to try and make a mistake. Paint can be repainted, after all.
Put All Together
Eventually, everything needs to come together to completion. This can actually be the hardest stage to do. Lots of people can begin a project, but few can actually finish. Here is where you will really need to keep on top of things. You need to make sure everyone has the parts and equipment they need, that small details are not overlooked, that there are actually light bulbs in the lights, that the toilets flush and that the doorbell works.
Related: 4 Rehabbing Materials That Are Always Worth Spending a Little More On
A major rehab project is like putting a jigsaw puzzle together. At times, it is also like herding cats. Before going in, understand that even the best laid plans will be thrown a curve, and some things will have to be learned through trial and error. Even the best contractors will make mistakes and get in each other’s way, and things can and will go wrong. A general contractor can certainly help, but you will be needed to make decisions, smooth over issues and keep things on the right course.
Remember too that every property is unique and will have unique problems. But when it all comes together at the end, it can be quite rewarding to sit back and look at the jewel you transformed from the rough.
Rehabbers: Any items you’d add to this list?
Let us know with a comment!