How To Rehab Houses For Minimal Cost And...

tool Hey Moguls, Lex Levinrad here to continue my series about doing rehabs at a minimal cost, leaving more profit for you. You can start with Part 1 here.

In the previous lesson, Part 2, we talked about estimating repairs and the importance of you - as the investor rehabber - needing to play the role of general contractor (GC). As I said in that post, one of the two biggest mistakes newer investor rehabbers make is paying too much for material and labor by hiring a GC - which costs a small fortune. You can simply learn how to do that role yourself and save yourself a lot of money – and after you’ve done it a few times, it really becomes second nature.

So, let’s get back into this series by talking about the second biggest mistake newer investors make when rehabbing…

Oops I Did it Again

The other big mistake that beginners make in rehabbing is over-improving the property.

They think they’ll buy the property, make it really nice and then sell it for a really big profit. And I call that a ‘beginner’s mentality.’ The problem is that - while it’s a nice theory to think that if you fix it up really well you’ll make big bucks – it doesn’t always turn out that way.

Here’s why…

See, houses get appraised based on comparable sales. Appraisers look at the square footage of the house and the square footage of other houses that have recently sold. So if a house sells for a certain price per square foot, people are going to pay approximately that price per square foot in that neighborhood.

Now, if you go and throw an extra $50,000 at it by putting in granite counters and Jacuzzi tubs and all these fancy amenities… people aren’t going to give you back that $50,000. In other words, you won’t see a return on that $50k. Yes, they might pay a little bit more because they’re thinking, ‘yeah, it does have a nice kitchen and a nice bathroom.’ But they’ll typically only pay an extra $5,000 or $10,000 because of it - you’re not going to get back the extra $50,000.

So the best thing to do is not to over-improve a property.

But on the other hand, if you don’t fix up the house properly, then it’s going to look terrible and you won’t be able to sell it at all or you won’t be able to get a good price for it. So what you have to do is fix up the property as nicely as you can without spending too much.

The Smart Way

When you’re rehabbing a house, you would be surprised what items really change it and make a difference. It’s actually the little, inexpensive things that really change the appearance of a house.

flow If you paint the inside of a house, put in some new tiles, and new carpet in the bedrooms, the whole look of the house is completely different. Let me be even more clear: You don’t need to go overboard.

You also don’t need to use the fanciest tile or high-end materials. If you are planning on rehabbing a rental, then you definitely should use the cheapest materials available since the tenants will likely not take care of your house.

If you’re going to rehab a house for a flip, then depending on the area, you could use nicer countertops, faucets, appliances, tile, etc. But still, no need to break the bank.

Be Wary for Rentals…

As a rule of thumb, when rehabbing a rental, go to Home Depot or Lowe’s and look for the cheapest vanity, the cheapest toilet, etc.

Here are some helpful material examples:

Glacier Bay is the cheapest all-in-one toilet and vanity currently available at Home Depot.
Be prepared to assemble cabinets instead of custom cabinets unless you have a great kitchen cabinet person.
With carpet, however, do not get the cheapest carpet since that is for industrial uses. Many times, you can put in laminate flooring, which can look like wood, and it costs just a little more than carpet.

You don’t need to put in high-end stuff to make a house pop and look good. Unless the house is in Beverly Hills or Boca Raton, you are fine with the inexpensive ceramic tile and basic items.

If you want to make some upgrades so the house stands out a bit - then go with granite countertops, stainless steel appliances and better tiles and faucets for the bathrooms. Yes, this will cost you more, but you will get this money back on resale and the house will sell quicker.

What about if you are buying to fix and rent?

Remember this as a landlord: Renters don’t take care of your property. They don’t really care about your property and they don’t care about returning it to you in the condition that you gave it to them. So don’t put in more than you need to. You’re going to need to replace many items in a rental unit over the years, and you don’t want to put in high-end stuff because you will seriously have your heart broken when the tenants ruin it. And they will.

I have seen tenants lay cigarettes on a brand-new Formica countertop while they were cooking, leaving cigarette burns all over it. I’ve even had a tenant burn down a whole house. Here’s another one… tenants leave their pets inside the unit and go away for the weekend, and when they come back, the carpet is full of urine and all sorts of stains – and they ask you to fix it.

These are the sort of things that tenants will do to your property. They likely won’t clean it properly, especially if you’re investing in lower-income Section 8 housing like I do.

rent Obviously, when you update your property with higher-end materials (and depending on the area), the quality of your tenants will be higher. They’ll take much better care of your property.

But, if you’re looking for cash flow, you’re probably going to find that the best rentals are in the lower-income areas. High rents and low prices = good cash flow. And low prices equals low income. Poor people don’t have money to pay for carpet cleaners. They have a renter’s mentality. In many cases, they are not even paying the rent since they are in Section 8 - the government or the city Housing Authority is paying their rent.

Sad but true - they are likely not going to take care of the house. So if you are renting, keep that in mind as you are looking at those nice countertops for a rental. (One ironic note is that granite costs more, but it lasts a long time and it is very hard to stain. So if you can get a granite countertop at a reasonable price, it just might make sense.)

Done for Now

Well, investor rehabbers, this is a good place to pause. In my next lesson in this rehab series, we’ll talk about subcontractors – and ways you can save money with them – or actually without them! I’ll explain… see ya next time.