Real Estate Investing – Rehabbing
One type of real estate investing I have always enjoyed is rehabbing. I think what I love about it so much is taking an ugly old house and turning it into something beautiful. Something that buyers want.
When it comes to real estate investing rehabbing is not actually the most profitable niche and it carries some risk. There are other types of investing, such as emerging market investing using real estate timing, that can be far more profitable. Back before I knew about real estate timing though I did a lot of rehab investing. I bought ugly houses fixed them up and resold them. Here is a picture of the kitchen for one of the ugliest homes I ever bought.
ugly kitchen- real estate investing rehab
This house had been vacant for 7 years! The widow moved out shortly after her husband had died and just left the house waiting to do something about it. The move was so spontaneous that she left food in the fridge and dirty dishes in the sink!
I made the mistake of opening the fridge after I bought the house and the smell almost knocked me to the floor. We had to clear out of the house and let it air out for more than an hour before we could go back in and resume work. In the end we ended up driving screws through the fridge door to secure it shut and took it to the dump without ever emptying it. It was pretty funny, but that fridge was scary!
As you can see this kitchen is all kinds of ugly. Everything was outdated. It stank, it was a mess, it was full of old stuff and we cleared the whole thing out and started over.
I learned some hard lessons about contractors in this house. I had been using a fairly reliable contractor as my general contractor for most of my rehabs but by the time we got to this house he was starting to get burned out. One of the biggest mistakes I made was NOT signing a written contract with him. I thought we had established a high enough level of trust that the contract wasn’t necessary, we just used his written estimate and any time I needed change orders he would provide me with a new estimate for those.
This was a big mistake for two reasons. The first was by far the most important – without a contract I didn’t have a time clause. As I said the contractor started getting burned out by the time we got to this rehab. The result of which is his work slowed down. Some days he never even showed up (if anyone has ever done rehabs before they know how frustrating it can be dealing with contractors who don’t like to show up for work). In the end we finished this rehab about 4 months late. 4 months is a lot of time in rehabs. When you add up my monthly holding costs for that 4 months it ends up being about $8,500 in costs. That was about 1/3 of my profit margin gone because of a slow contractor finishing late.
If I had a time clause he would have been penalized for every day he was late finishing his work. Believe me he would have been a whole lot more motivated to get things done then.
Real Estate Investing - Rehab Kitchen
By the way, here is another shot of this kitchen after we finished. Looks a lot better here, doesn’t it? Anyway, the other mistake I made by not having a written contract was that I didn’t have a warranty for this contractor’s work. When you are doing this much work on a house it’s pretty much inevitable that something is going to need to be corrected later on. In this case it was the new eavestroughs that we had a problem with. They leaked in one place – right over the front step! That’s not a very good place to have a leak, especially when the weather turned cold and then the front step got covered in a sheet of ice from the leaking eaves! Needless to say my burned out contractor refused to warranty his work so I had to hire someone else to come in and fix it.
By the way, I still like rehabs in real estate investing, but my exit strategy has changed some. Instead of fixing them up to resell, my rehab strategy is now buy them using real estate timing, so I know the right time to buy, fix them up and then hold them as rentals until the real estate timing market analysis charts tell me it’s time to sell. This GREATLY increases the profit margin on this type of property. By buying at the right time I’m getting the best deals so it makes it great for having the property cash flow as a rental during the hold period.