One of the more costly projects a real estate investor can undertake is rehabbing houses. This endeavor can be both daunting and challenging, especially for beginner investors, as it consists of purchasing a property, renovating it and selling it for full market value. Rehabbing requires an attention to detail and a lot of time to master, but it remains one of the more lucrative investment options in real estate. That said, a common inquiry among beginner real estate investors is how to rehab a house.
Rehabbing a house takes time, working capital and experience; it’s not something you want to jump right into if you’re not prepared. Instead, investors are advised to mind their due diligence before getting started, including reviewing all their options. While rehabbing can fetch profitable returns, it’s a complex exit strategy that shouldn’t be taken lightly.
What Is A House Rehab?
A house rehab is the process of taking a property and restoring and improving upon it. This usually helps boost the property into satisfactory, or even superb, condition without drastically changing the floor plan. According to Homeadvisor.com, the national average for this type of undertaking costs $39,567.
Before commencing a real estate rehab, it’s important for investors to first understand the intricacies of such an undertaking. First off, there are three categories of rehabs: personal rehab, rental rehab and a fix and flip. This is important for investor to comprehend, as each approach will differ in how profits are made, as well as the costs that go into the project.
House Rehab Vs Fixer Upper
The best way to think about a house rehab vs fixer upper is in terms of overall workload and cost: a house rehab is typically a more comprehensive project when compared to a fixer upper. House rehabs will involve renovating the property and making bigger changes, like fixing electrical, plumbing, or roofing issues. A fixer upper typically focuses on cosmetic changes that can be made quickly or at a lower cost than a full rehab. A good rule of thumb is that if someone can live in the property during renovations, it is most likely a fixer upper and not a full house rehab.
How Much Does It Cost To Rehab A House?
A rehab can cost anywhere from $20,000 to $75,000 and up. To find a rehab project within your budget, it is a good idea to start by assessing how much capital you have access to. This will help you narrow down the size of the property and rehab you can take on. Next, begin touring potential properties and always keep an eye out for which type of projects will need to be completed to renovate the property. From there, investors can nail down the specific cost of rehabbing the house. Here are a few expenses to consider when planning a house rehab budget:
Materials: Estimate potential repairs during the property walk through in order to look up potential material costs. These include new countertops, appliances, paint or flooring, and any other supplies necessary to the project.
Labor: The most essential part of a rehab project is a good team. Not only will investors need a contractor, but they are likely to need an attorney, real estate agent, and lenders. Each of whom will be associated with various costs.
Purchase Price: The initial purchase price of a property is the foundation of a rehabbing budget, as it influences everything from the loan required to the future return on investment.
Lender Fees: Depending on how the property is financed, different lender fees could be required. More of then than not, these will cover paperwork, title searches, and other costs associated with the purchase of a property.
Ownership Costs: Do not forget to account for holding costs when estimating the overall budget. This includes the costs of utilities, property taxes and overall upkeep during the rehab and selling process.
Staging: After the rehab is complete it will need to be staged and photographed to sell. Investors should always include this in their initial budget to avoid being caught off guard by extra expenses once the rehab itself is complete.
Permits: The permit process can influence the cost and timeline of a house rehab. A permit will typically be required when adding to the square footage of a property, parking a dumpster for old materials in the street, and when changing utilities to the property.
How Long Does It Take To Rehab A Home?
It can take anywhere from six weeks to six months to rehab a home. There are several factors investors can use to determine how long a project will take including the size of the property, the specific renovation projects, and your team of laborers. To get a more concrete understanding of a rehab project, look at each of these factors before purchasing a given property. It can also be a good idea to research how quickly properties are being sold in your market, as this will hint at how long it may take the property to sell once the rehab is complete.
How To Start Rehabbing Houses?
To start rehabbing houses, investors should first research their market area, assess their financing options and assemble a team to work with. A great place to start is by attending a real estate networking event in your area and getting to know other real estate professionals. Many aspiring investors also find it helpful to find a mentor in the industry who can provide guidance on getting started. As you familiarize yourself with the overall work involved in a rehab, you can then get started by searching for ideal properties.
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How To Rehab A House
Evaluate the property with the help of a professional inspector.
Create a checklist so that rehabbing a house from start to finish becomes a reality.
Develop a rehab budget once you understand your scope of work.
Find a contractor who is best qualified to execute your property rehab vision.
Obtain the necessary permits that are required for your project.
Commence with the cleanup and demolition phase that will allow for renovations to begin.
Get started with exterior improvements that will give the property the curbside appeal it deserves.
Prioritize interior improvements by choosing repairs that offer the highest return on investment.
Finalize any improvements before considering the project a wrap.
Another component for investors to consider is making an offer. This introductory step requires real estate investors to run the numbers on a deal to assess exactly what type of offer they can make. Furthermore, this will also involve the After Repair Value (ARV) estimate, which is used to calculate the value of the developed property after repairs have been made. This all-important number will help investors to not only determine their exit strategy moving forward, but also reveal which financing options work best for their situation.
For investors looking to get started, the following breaks down the steps of how to rehab a house on a budget:
The initial walk through of a property is one of the most important steps to succeeding in a real estate rehab. When doing it on a budget, however, this first step climbs to the top of priorities, as overlooking something could potentially turn a profitable property into a mistake.
Investors should begin each property inspection with a professional inspector. These individuals will not only help to identify items that need to be repaired, but recognize things you would have otherwise missed. In most cases, a home inspection will include examining the home’s heating and air-conditioning system, electrical system, plumbing, foundation, roof, flooring, walls, ceilings, windows, doors and insulation.
As an investor, it’s important to take a combination of notes and pictures during the initial inspection. These items will play a significant role in developing a rehab checklist moving forward, as well as help investors better understand what to look for in rehab properties moving forward.
House Rehab Checklist
Now that you have a clear understanding of the work that needs to be performed, the next step is to create a rehab checklist. Thrifty investors should outline the necessary repairs that need to be made, including highlighting the costs associated. In order to avoid missing anything, investors should incorporate their inspection report when generating a checklist. This small measure will help to produce a detailed roadmap of what needs to be done to the property.
Another factor to consider, especially for those seeking how to rehab a house on a budget, is the return on investment. Investors on a limited budget will need to examine the thin line between cost effectiveness and high returns, as some rehabs can end up costing you more than they’re worth.
Schedule a property inspection: Before investing in any type of property, scheduling a property inspection should always top your to-do list. A professional inspector can help you create a list of exactly what needs to be repaired or fixed.
Create a budget: Once you have your list of what must be repaired for healthy and safety reasons as a result of your home inspection, you should be able to start estimating just how much each renovation project will cost. You will most likely need to include the cost of cosmetic updates as well. Itemized components of your budget will most likely include the cost of materials, permitting, and the cost of labor at the very least.
Interview contractors: Working with an experienced, quality contractor can be the difference between a good rehab and a great rehab. Be sure to ask your personal network for referrals, and spend time checking references. You also want to make sure that your contractor is someone you can see yourself working with over the next few weeks to months.
Schedule a walkthrough: Once you have hired a contractor, schedule a property walkthrough that you will conduct together. This is the time when you can point out the various projects that you have identified as a result of your initial inspection. An experienced contractor should be able to help you modify your timeline, budget and checklist.
Obtain building permits as necessary: Make sure to apply for any building permits as necessary, which are usually required during a rehabilitation project. Verify what permits you may need by contacting your local government.
Budget & Finances
Once you understand the scope of work that needs to be done, the next step is to assemble a rehab budget. Although every investor’s financial plan will differ, it’s important that you have a profile of the work that needs to be performed, including itemized repairs, along with a predetermined dollar amount you are willing to spend. Doing so will enable investors to prioritize their checklist or make changes if necessary.
The importance of finding a quality contractor is second to none when rehabbing a property. These individuals will play a crucial role in transforming your property into a winning investment. However, not all contractors are created equal. Investors will need to spend a responsible amount of time researching general contractors. This meticulous process will help investors to steer clear of bad contractors, which can ultimately end up costing time, patience and money.
There are several things investors will want to keep in mind when looking for a contractor, including:
References: Get at least three references from past clients.
Project Management: Do they have adequate time in their schedule to perform the necessary duties?
Licensed and insured: Make sure they have the qualification and certificates to perform the type of work you’re hiring them for.
Payment Schedule: Determine if the proposed payment schedule aligns with how you intend to pay them.
Work Ethic: Are they reliable? Do they stand up to their word?
Once you’ve found a number of contractors, the next step is to have each one submit a formal bid. This will enable investors to hand pick the contractor that best fits their needs as well as their budget.
Do you have the required permits to perform the rehab? In order to avoid violating local building codes, it’s critical that permits are pulled. It’s recommended that investors contract their local building department to determine the necessary permits they need. In most cases, the contractor will determine what permits are needed based on the type of work.
Now begins the physical work of rehabbing your investment. The stage will include removing all trash from inside and outside of the home, as well as damaged items such as doors, windows, fixtures, etc. The purpose of the cleanup is to prep the property for renovations, which will allow for the rehabbing process to run smoother. Additionally, this stage can be completed for next to nothing in cost, as the majority of work can be completed through your own sweat equity. Although this process will not add value to the home, it’s necessary component to facilitate the rehab process and ensure progress is made.
One of the more affordable expenditures when rehabbing a property is the exterior. Improvement to the outside of a home, which will range from the front yard, driveway, front door and others, can generally be accomplished without the use of a contractor, although items like pool maintenance may need the assistance of professional service. In most cases, these enhancements can be performed at affordable costs, helping to save investors on their long-term budget. That said, the cost of rehabbing the exterior of a home will differ from property to property, but these costs will be much lower than improvements made to the interior.
The core of costs when rehabbing a property will almost always involve the interior of the home. Depending on the number of doors, windows and other repairs that need to be made, this scope of work will almost always demand the biggest budget. However, there are a few things investors can do to stay on budget.
As mentioned earlier, it’s critical that penny-pinching investors choose repairs that offer that highest return on investment. These upgrades will help to produce the best return for your dollar. In addition, there are unlimited ways for investors to enhance the interior appearance of a home through do-it-yourself improvements. In most cases, the majority of work (and costs) of rehabbing a home will come from internal components of a home such as repairs to the HVAC, plumbing and electrical system.
The last piece to rehabbing a house on a budget is finalizing the improvements. With the contractor by your side, it’s important you examine all of the work that has been done, including double checking any adjustments that were made during the renovation. A final inspection by a professional service is also recommended, as they can essentially confirm the work completed by the contractor is up to par with standards.
6 Property Rehab Tips
Rehabbing your first house is no easy feat, and you will be sure to welcome any advice from experienced rehabbers. The following are some helpful tips for your very first project:
Don’t bite off more than you can chew: Especially with your very first project, do not hesitate to start out small. Perhaps starts out with a small single-family property or even a fixer upper, and stick to a few renovation projects that offer a high return on investment. Take on bigger challenges as you gain more experience.
Take time selecting your crew: One of the keys to achieving success during a house rehab is working with the right team of laborers. This might start with hiring the best possible contractor, and working with that individual to screen and hire great construction workers that you can depend on.
Don’t forget to factor in holding costs: When creating your estimated budget, do not forget to factor in holding costs, including the timeline of your renovation project, the marketing phase, and finally the selling and closing phases. It would be smart to factor in estimated costs for a case in which the property does not sell right away.
Have a contingency plan in place: What will you do in the worst case scenario that you are unable to complete your rehab project? Although no investor wishes for this outcome, it is nevertheless important to have a contingency plan in place. Line up an exit strategy in case you have a falling out with your contractor or you run out of money.
Leave Extra Room In Your Budget: One of the biggest mistakes you can make when rehabbing a property is failing to plan for the unexpected. While there is no way to predict exact costs that may arise when renovating a house, you can leave a little wiggle room in your budget.
Always Get The Right Permits: It is not uncommon for local municipalities to require property owners to get different permits or licenses before working on a house. Always check with your contractor and city government to make sure you abide by any regulations on property rehabs.
Rehabbing A House: 4 Mistakes To Avoid
As you gain experience, you will become more comfortable with the process of rehabbing a house. However, that may not make the first project any less intimidating. Read through these final mistakes to avoid before embarking on your first property rehab:
Forgetting insurance: Property insurance is crucial to the success of a rehab project. In case anything unexpected happens, insurance can help protect both you and the investment. Always make sure your bases are covered, especially as people start working on the actual renovations.
Failing to research the market: Just because a market is well suited for one exit strategy, does not mean it is the right place for another. Make sure the home is located in an attractive area and consider what amenities you could highlight in the future when selling the property. Look out for a market with potential, and don’t be afraid to branch out of your local area.
Choosing the wrong sale price: No matter how excellent a property is, it must be priced to sell. If the home is priced too high, it will sit on the market and increase your holding costs — undermining the potential profits of the deal. Take comparable home prices into account before planning the renovations and purchasing the home.
Not knowing when to walk away: It is okay to walk away from a potential deal if something is not right. For example, don’t be afraid to pass up on a property if you cannot find the right financing or team. These details can greatly impact the success of the project, even if the other details seem perfect.
Investors interested in rehabbing houses should not be intimidated by renovation horror stories or HGTV specials. With the right research and planning, any investor can learn to rehab houses successfully. The first step is finding a property that gives you the best chance to make your money stretch. Do not be afraid to start small when it comes to rehabbing houses, even the best investors had to start somewhere.
Do you have any extra pro tips on rehabbing a house on a budget? Share your advice in the comments below.
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