Rehabbing Properties - Six Tips You Should Know
Always plan ahead when rehabbing your property
On March 29, 2022, Empire Investment Club Members were invited to attend a Club Conversations entitled “Rehabbing Properties—What You Need to Know.” During this event, Jennifer de Jesus introduced six important tips to keep in mind when looking at updating or renovating an investment property.
Tip #1: Start with a plan long before you own the property.
The time leading up to you purchasing the property is the most ideal time to plan your renovations. Remember that you don’t own it yet, so the time it takes to formulate a plan costs you nothing. The minute you own that property, the clock starts ticking and so does your wallet. You will want to take advantage of any lead time that gives you a jump start on the plan. Using non-ownership time helps you to limit the costs associated with holding the property especially if the property could potentially be unoccupied during the rehab.
Tip #2: Be willing to change your plan based on circumstances.
When you buy a property, you’ll come up with a plan of how you intend to use that property. The minute you take ownership, things change. Let’s say that right as you’re ready to give notice to the tenant, another tenant stops paying. Do you want to deal with the one that’s not paying, or have two vacancies at the same time? You may have this guidebook of what you want to do in a specific order, but be willing to change it if circumstances arise. For example, you have unplanned emergencies on the building such as a heating issue. Do the necessities first and then deal with your improvement.
Some people who buy buildings want to do all their rehabbing right away, and as long as you can afford to do so, there’s nothing wrong with that. But if you’re buying a value-add property and you want cash flow out of it, you have to be more strategic on how you go about the renovations. Let’s say you remove the lowest paying tenant, do the renovations, put it back on the market for lease and you secure a new tenant. The money is not instantly made back when you lease the unit. You may have a leasing fee to pay and you still need to recoup the cost of the turnover before you start another one. It takes time to realize back the costs of the rehab coupled with the time that the unit(s) are vacant. Keep this in mind when planning your strategy. If your building has enough additional income that you can afford to have one unit vacant and still make a profit, then I say go for it! Get your renovations done as quickly as you can so you can start to realize the additional equity for future purchases.
Tip #3: Know your audience and what finishes are desired by tenants.
Don’t over-improve a property. For example, you may have heard “You never want to have the nicest house on the block,” which holds true for rentals. You have to know your competition. Our marketplace divides properties into classes:
A-class properties are luxury properties in the best areas and get cream of the crop rents with high end finishes.
B-class properties are typically are in more of a suburban location, get great rents but not as high as A class. Adequate for vinyl plank flooring and laminate countertops.
C-class properties are inner city, higher turnover of tenant, transient tenants. Think of the type of material you’re putting into the property. Think about durability. There’s no shortage of conversations with investors about replacing the flooring in a property, and when you get estimates you may think carpet is cheapest so you go with carpet. But, it’s not the most durable. Carpet can last 1, 2, or 10 years and it completely depends on the tenancy. If you have to replace carpet between every tenant, that could be costly. Consider going to a vinyl plank floor. It will cost you more, but the durability is a final investment for you.
Tip #4: Have a budget.
You have to know what you’re going to get for the renovations. If you’re getting $500 for rent now and you’re only going to get $550 when you turn over the unit, for that $50 increase, I wouldn’t suggest that you take on the expense of a turnover instead, build in an automatic lease increases to get 5%- 10% more each year. Now if you are talking $500 to $1,000 a month in an increase, that’s different. You have to ask yourself how long is it going to take you to pay yourself back. Shoot for the reimbursement for under 1 year. If it’s longer, you might jut be over improving. How long you’re going to hold that building is also a factor. General rule of thumb is within the first year, I get that investment back and even make profit.
You also need to look at capital improvements that you will have to do at some point, depending on how long you’re going to hold the building. For example, if you choose not to fix the roof correctly, you’ll spend a lot on interior renovations as water damage doesn’t always show itself right away. Windows and heating systems are more about comfort for your tenant. If you have electric baseboard heat, consider how awful our winters are. If you have windows that are single pane, their electric bill will be high. In addition to their rent, tenants cannot afford a $300-400 a month heating bill during the winter months. If it’s going to put you in a position where a tenant will stop paying or you have to replace them every year, it’s not worth it to skimp. Think about what capital improvements make the most sense. Anything exterior to the building, concrete work, HVAC, flooring—those are all capital improvements.
Tip #5: Is your property going to be tenant occupied or not?
If you have a long-term tenant, they may get to a point if you don’t replace the carpet they may not renew. Try to avoid all work while tenants are in the property—you have to move everything, and each time you touch their stuff, you’re taking a risk for damage. I highly suggest that you get something out of it. Think of it as an exchange—negotiate with the tenant that you will replace the carpet, that they need to remove the furniture and sign a lease extension at this rate. Don’t give something away for free without getting something in return. Get the renovations done as fast as possible to lessen the inconvenience to your occupied tenants. If you are pre-leasing, considering lessening your scope of work once you secure a new tenant. Keep in mind that the new tenant already saw the condition of the unit and decided to lease it. You do not need to do a full renovation for that unit if the current condition was acceptable.
Tip #6: Know your property’s city ordinances.
Sometimes we forget with any kind of renovations that certain things require permits. If you don’t plan ahead, they can delay the project. The general rule of thumb is that most areas follow the National Building Code. Some municipalities have their own rules, but most follow the NAHB. If you’re going to replace the flooring or paint the walls, there’s no permit required. If you are replacing plumbing, adding outlets or rewiring, you need permits. If you’re adding drywall, you need permits. In your renovation plans, know what’s required for your municipality regarding permits. If you’re not compliant, a municipality could force you to move that tenant out. Get the permits first before doing your rehab.