How to Execute a Single-Family Property Rehab Investment

When I was first asked to write this article about property rehab investments, I was suddenly overwhelmed.

Here I was a college educated business owner, bragging about my degree in construction, several years of real estate experience, and hundreds of rehab projects- nervous of simply writing an article on those exact items.

The truth is, those feelings are the exact feelings anyone feels when given a task of a large scope, and then forced to walk the walk. I had those feelings the first time I was faced with a thirty thousand dollar rehab project. So what did I do?

Begin With the End in Mind

Exactly where and with what do you want to end up? Quick equity grab, long term positive cash flow? What’s the goal? Just as we are all taught, find out where you want to go, get a map and go do it.

Every rehab project I have done had a specific goal for the property rehab prior to the purchase. With these specific goals, I could approach the negotiating of the deal with a specific plan of attack and know my boundaries.

I knew who my target audience was, what they were going to expect, and how I would deliver the product. This gives you such a feeling of security, that in any type of transaction (single family, multi family, commercial, whatever) you take total control of the situation. The due diligence of knowing the deal before being involved, makes this a business decision, not a personal goal or accomplishment.

This is an Investment, Not Your Home

Don’t take it personal. Once you have established your market, complete the home to those standards. Granite is not needed in a Formica neighborhood. Always focus on apples to apples.

We always want the best product at the best price. A strong evaluation of the homes you have established as comparable is needed to determine the end result of your rehab of the property. If you have a neighborhood of hard siding, we don’t need to add brick to make it more appealing.

What’s appealing to you is not always appealing to the new tenants/owners of the property. There are always diminishing returns so stay focused to the goal. That’s why we made a map. Follow it.

Location

My experience is specific to my location, but I will say that that is exactly the point. Color scheme, landscaping, and curb appeal must be specific down to the street the subject property is on. Your property must be the example of what your neighborhood represents, not what the homes on HGTV look like. I myself tend to drift into the emotional state of “Wouldn’t it be cool if………!” The point is, cool doesn’t always cash flow.

There are several things to keep in mind when estimating cost of repairs. I will first start by saying that repairs are specific to your area. Contractors in Houston will not be the same price as contractors in San Antonio. I know that paint is paint, but people are different.

Over a short period of time, as you keep very meticulous records of cost per item, you will begin to develop a cost per square foot for labor and material. The point of this is to be able to very quickly get a rough estimate of repairs.

By no means should you live by these numbers, but when you’re sitting in traffic and your agent calls with a deal you want to be able to make a move. By knowing the square footage of the home and its location, you can quickly evaluate ARV, repairs based on square footage, and what your purchase price needs to be.

Plan of Action

How does one eat an elephant? One piece at a time! When we are purchasing distressed properties we are buying these big pink elephants. The have cracked toe nails, purple spots everywhere, and they stink.

So what do we do? MAKE A MAP!!!! PLAN OF ACTION. You must write it down. Just as I will get to later in this article, I would never trust a contractor that doesn’t take notes on a project. One should never ask another to do what they wouldn’t do themselves.

Start at the curb. Take the time to meticulously work through every detail by yourself, making a list of items to complete, a list of questions to get answered, and of course a wish list.

There will always be those items that we can add due to some room in the budget. But remember, the cafeteria always has the desserts at the end of the line. Get what you need first, and only if there’s room, add the pie.

Establishing Strong Relationships with Contractors

You began on this adventure with the goal of being profitable. We must always remember that the hard working, professional contractors we work with made the same decisions when they started their business. When purchasing properties we treat all sellers with respect, and make them the best offer that we can.

Often buyers will turn to their contractor and beat them up on the price of the rehab. How is this fair? We ask them to give us a complete estimate for the rehab so that we are able to make a sound offer, and then we turn and tell the contractor to give us a better deal.

This mentality only leads your relationship with your contractors down the wrong path. You purchased the property based on your evaluations of appraised values, amount of repair, and what it would cash flow. Stay true to those numbers, and you will have a lasting business relationship with you contractors.

This is A Business

It took me a period of about two years to finally get a sound group of contractors, and around 100 rehabs and dozens of contractors, until I finally found two crews who could keep up with my business plan. From there we began to fly.

After about two years of great working relationships, I started buying Christmas presents, Thanksgiving dinners, and paid fishing and hunting trips. Now don’t confuse the intentions. Those are always great things to do, but it created an employee relationship with my contractors.

Suddenly the drive to finish projects wasn’t there. They began to become comfortable that there was always going to be another project. I began to pressure myself into believing that their families depended on me. Never forget that you run your business, not theirs. They are sub-contractors. Always treat everyone with respect, but don’t lose focus of your business plan.

So what stops us from enacting this plan? It’s the getting up in front of the class to give a speech feeling. Its jumping off the cliff into the lake nerves that slows us down. The list can go on and on. The only way to get past the nerves is to trust your coaches, believe in yourself, and then go do it. Three words always ring in my head when I become afraid of a task at hand. “Just Do It”. Nike says it best.

So here we are. No longer are we sitting in orientation with the deer in head lights look. Now my fear of writing may never change, but the daunting task of completing a thirty thousand and more rehab is a walk in the park. Always, always stay true to the map. Stay focused on the goal, and never take advantage of anyone. Leveraging other people’s talent is one thing, making every relationship a “win-win” is a must.

Comments

  1. Shauwn,

    Good points you had in your article. Hammering the point to know your area/market where you’re property is located I believe is one of the keys to getting your highest rate of return. Not overdoing it or underdoing it but having it just right…like Goldilocks!

  2. Beginning with the end in mind is probably the hardest thing I deal with. Being a quick-to-decide ‘A’ personality, this is my biggest hurdle. Master this part of the equation and your business plan becomes a reality!

  3. Great points and your humble approach in working with contractors! You do need good contractors to make your real estate “business” grow, they are out there in the vendor list or thru referrals.

  4. Thanks for the great article. So many people have trouble with contractors and it is their fault not the contractors.

  5. Thank you for sharing such valuable experience. It’s very important to remember that we have to make business decisions when buying, rehabbing and renting. Writing goals and a plan of action while not in the emotion will prove to be invaluable when our emotions begin to take over. Don’t just write them – refer to them.

  6. Damon Janis says:

    Thanks for sharing these ideas Shauwn. This information will help me do rehabs better.

  7. Amber FitzPatrick says:

    I love the analogy: “There will always be those items that we can add due to some room in the budget. But remember, the cafeteria always has the desserts at the end of the line. Get what you need first, and only if there’s room, add the pie.”

  8. Great points Shauwn, thank you for your expert advice, this will help me with my future rehab projects.

  9. Montelongo says:

    Do you have a generic check list (MAP or PLAN OF ACTION) you can share with us? So I wont reivent the weel or wait until the 100 rehab’s to realized i missed something from the beginnig.

    That would be reallly appreaciated.

    Thanks,
    Montelongo

  10. Lynn Andris says:

    Great article. One of the best things about LU is the win-win mentality in every aspect of our business. Vendors know that they must price their products and services well, communicate clearly and accurately and produce a high quality finished product if they want to build their business among LU members. We, as investors, need to remember to do our part. We need to understand our market, know what we are trying to do with the property, make sound decisions about the deal and communicate our needs clearly. Vendors cannot change directions as we constantly change our minds. We need to be good customers to get good results.

  11. Your article was well written Shauwn. I would add that research on sale and/or rental rates for the area BEFORE you buy can make or break your investment. As an owner of a property management company I’ve seen too many buyers of REO’s that were not prepared. They come to us after they bought the home to ask the rental value.
    Greg
    Granite Bay

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