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I have completed more than 500 rehabs on $30-70k distressed properties in San Antonio TX in my real estate investing career. In the early years, I was in there swinging a hammer, floating floors and hanging drywall with my crew. I’m out of that now, but all that hands-on work taught me the importance of doing a good rehab – but knowing when to stop! If you over do it, watch out:
I have seen dozens of real estate investors spend $10-$30,000 or more than they should on a rehab. This is the most common mistake that new real estate investors make. This can doom your project, and you can avoid it by…..well, just keep reading 🙂
Staying reasonable on rehab is especially important when you are dealing with distressed, under market value properties, as I do. I buy a house for 20% under market value, perform a light rehab, and resell it with owner financing to make about a 12% return annually for my investors. Such as this house we did in 2014.
But note: The level of rehab I do TOTALLY depends on the area! I kept the rehab on this house in zip code 78212 north of downtown San Antonio in line with the neighborhood, which meant nice flooring, new light fixtures, paint in and out, and minor foundation work on the front corner, or about $10,000.
The house sold about 5 weeks after the light rehab and makes the investor 12.3% per year with no property management expenses.
My investor’s return would have plummeted if I had overdone the rehab with a new roof and AC, so I’m very careful to stay on budget and in line with the other homes on the street.
Want to avoid over rehabbing your properties and dooming your real estate investing career? It all comes down to this:
Know Thy Neighborhood, Investor!
I buy and sell over 100 houses per year in neighborhoods around downtown San Antonio, particularly north, west and south of downtown. So, I pretty much know how houses in these zip codes (78201, 78212, 78214, 78207, 78244 among them) are appointed.
Also, my construction crew has been with me for 11 years and they live in these areas. They also provide me with detailed advice on what to fix and what to leave alone, based upon their and their friends’ and families’ experiences.
The house above is in 78207, which is a rising area, but not as good currently as the house above that in 78201. That means that the rehab budget is much more spartan. In this case, we just want the roof, foundation, plumbing and electric working. So the rehab looked like this:
- $1500 for paint in and out, including painting floors
- $1500 for raising foundation
- $1000 for plumbing
- $1000 clean up
There was no need to do nice flooring, granite or tile in this house, based upon what the houses on the street have. I know that because of all the years of experience I have in this area.
Spending more than $5000 in rehab on this house is unnecessary. Granite? Forget it. Tile? No way. As is, this house sold with owner financing and makes the investor 11% per year with no property maintenance costs. Knowing when to stop on rehab is what makes my investors serious, long term, buy and hold cash flow.
On the other hand, if you don’t do ENOUGH rehab in nicer neighborhoods, the house will sit and sit. This house in 78201 is in a rapidly appreciating spot north of downtown:
This one required $10,000 in rehab because of what the other houses around it have: granite in kitchen, tile flooring, new light fixtures, tile in bathroom, new flooring, new stain on old wood flooring, and new HVAC:
This house sold the week after we finished the rehab, and earns my investor 12.9% ROI without property management expenses. If I had skimped on this rehab to save the investor money, the house would still be on the market.
So, not losing on rehab comes down to intimately understanding the neighborhoods in which you purchase. Frankly, that takes many years of experience and dozens of deals under your belt. If you don’t have that level of experience, I strongly advise you to partner with an expert investor and licensed agent in your city. He or she can advise you on how much rehab to perform, without overdoing it. You want a licensed agent who also is a very active investor in your neighborhoods.
And if you can do that, you will be well on your way to making solid long term cash flow on your investments, and maybe you can even financially retire early, like I did. 🙂