Rehabbing Flashcards
For repairs, why ask for credit after purchase instead of reducing purchase price?
So you can still get the full loan and essentially finance the repairs rather than having to come up with the cash.
How long do typical flips take?
3-6 months
How long do typical value plays take?
12-24 months, but reap much larger rewards
Looking for how much profit after rehab?
Should be aiming for at least 20% profit AFTER you’ve factored in repair costs. Best properties to look for are ones that look awful but only need cosmetic repairs (MM)
Best properties to look for?
Ones that look awful but only need cosmetic repairs (not structural, mold, termites, etc.)
What’s considered a cosmetic repair?
For interior, carpets, appliances, paint. For exterior, light repairs on woodwork, roofing, siding.
80/20 rule of rehabbing:
You will get 80% of the benefit from doing 20% of all the things you could do to reposition that property.
Find the sweet spot on your rehabs, if you over rehab you may get good tenants but bad returns. Under rehab and you won’t attract the tenant profile you’re after.
Why to not allow contractors to tell you how repairs will be done?
They sometimes choose overly expensive materials or methods when a solid and cheaper fix is available.
Exterior items to improve:
- Paint - Fix wood damage and paint over existing painted surfaces.
- Consider vinyl over wood siding depending on price.
- Roofs - Make them a priority. Roof work will damage paint so be careful.
- Landscaping- if older mature plants can be trimmed to look nice, do this first. Trees look great but roots can damage pipes in some cases. If trees block lower views on the property, “Raise the canopy” and have skilled arborist trim lower branches.
- Repair or Replace Signage
- Rehab the Pool and decking. Or can fill with concrete if tenant profile allows
- Reseal and Stripe Parking Lots
- Improve Drainage - No standing water
- Fix Damaged and Broken Windows and shades. Shades need to be uniform for appearance from outside.
- Fix or Improve Lighting - Lots of floodlights gets rid of bad people. Should be fluorescent to save money
Interior items to improve:
- Always add 1-2% percent for repair/maintenance budgeton properties older than 20 years old.
- Paint: use neutral colors - off-white for walls, semi-gloss white for trim. Can offer an accent wall of their choice (from certain colors) for an extra $20 a month
- Upgrade Appliances. If worn/scratched, ok for C property, but not A or B.
- Repair Cabinets - don’t have to upgrade whole cabinets, just reface
- Repair or Replace Countertops - Texture Overspray (super hard paint and inexpensive, not for A property though)
- Replace Tile or Linoleum if worn
- Clean or Replace Carpet: use as long as possible, carpet cleaners can do wonders. If replacement needed, use medium dark color, not to make room gloomy, but enough to cover stains (multi-color brown can be good)
- Refinish Hardwood Floors: easier than carpet to maintain. “Allergy Friendly for marketing”
- Replace Faucets - Don’t go cheap, will be maintenance headache.
- Replace Light Fixtures - Author likes brass and glass. Ceiling Fans are a nice touch.
- Replace Mirrors - Bigger the better, making rooms look bigger. Kitchens and baths sell units. Medicine cabinets suck.
- Upgrade the Laundry Room - Must get cleaned daily and maintained regularly so all units work well. Can get free units by having a brand give you all units and maintain them, but they get 50% of money made from the units
Choosing a contractor:
- Larger construction companies usually have better economies of scale. $$$.
- Always get contractors license, certificate for liability insurance, workers comp insurance certificate. Don’t ever use unlicensed electrician.
Good contractors follow people who PAY ON TIME and can refer other trades.
Tips for dealing with contractors:
- Get EVERYTHING in writing or it won’t get done. Use contracts.
- Important clauses:
- Make the contractor pull permits so you are not liable.
- Make it mandatory for work area to look Broom Swept Every Day
- Penalty Clause: Have THEM give you a finish date, write down daily penalty $ ($50-$200/day). If they balk at this, find another
- Scope of Work: Be VERY specific and assume NOTHING. Even a dumpster bin, provided and removed by contractor.
- Draw Schedule: NEVER give 50% upfront. 10/30/30/30 draws (10% up front for materials, then 30% paid after each third of work completed). If they balk, find another
- Punch Out List: At each 30% phase, walk the property, then pay immediately if complete or ask them to finish all of that phase before getting paid.
- Change Orders: Changes must be signed off and authorized BEFORE starting. Don’t want to risk the contractor filing a mechanics lien on the property if they ask to get paid for CO at end of project that you didn’t know about
- Lien Waiver - Always have them sign off and NEVER pay in cash regardless of their discount. Need to be able to approve you paid them.
- Get their home address and telephone number so you know how to find them if necessary
Fudge Factor to add while working with contractors:
Always add 10-20% cushion for things that go wrong. Add this to your rehab number after getting quotes from your contractors. Use 20% starting out when you don’t have much experience.
Why overages clause (same as change orders?) in contractor’s contract:
Always have this. They are experts and should anticipate possible overages. Walk job with contractors beforehand and talk about potential overages that they would anticipate and what those costs would be. Your job to make contractors know that they should be anticipating potential overages and give you a cost for those. You must require that they notify you before starting any overage work - put this in the contract and make sure they know this before the job starts. Always require that the contractor knows if major work will trigger ADA concerns. Along with unexpected problems, always make sure they will finish on time.
How to bid out construction job?
Some people lowball on purpose to make it up later on “unforeseen overages”. Protect against this by giving all bidders a spec sheet on which they bid, giving specific bidding instructions for each job, so they’re all bidding on same items. Require contractors to list all tasks they will perform, broken out with costs for each (this also helps if you want to take something off the job, easy to know exact amount to deduct). Don’t accept general description and lump sum. If receiving substantially lower bid, review it item by item with contractor before accepting. Always trust your gut when evaluating bids.
