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If you've thought about buying investment properties and renting them out in order to generate income, now is the perfect time to take action. Property values have declined dramatically, foreclosures have glutted the market, and lots of people need a place to live.Savvy investors can purchase properties for pennies on the dollar - especially those properties in downtrodden neighborhoods. These properties don't have an "after market," meaning you won't be able to sell them to first time homebuyers (just other investors). However, they make perfect rental properties.
And, the opportunity to purchase and rehab rental property right now has never been better because construction costs have come down - the cost to rehab has never been this low.
Before you rush out and purchase a property, however, it helps to know your ABCs of rehabbing properties. When considering rental properties, it pays to classify properties into three categories.
The C-Level Rehab
This type of rental property is generally geared to Section 8 renters - those who receive assistance from the government - and it's the type where you want to do the least amount of work while still meeting government regulations for Section 8 housing.
Any major issues with the building, including structural, windows, pests (bugs and rodents), and mold, will need to be fixed and pass inspection. You'll also want to inspect all fixtures. My goal is try hard to keep existing kitchen and bath fixtures. If you do need to replace anything, don't go for the cheapest replacement as the item will need to withstand wear and tear by tenants.
You'll also want to make the units look nice by adding a fresh coat of paint, replacing torn or dirty shades, steam cleaning (or replacing) the carpets, refinishing the floors, and replacing counter tops if necessary.
Home Depot is a great place to shop because 1) they have merchandise that ranges from low-end to above middle grade, and 2) most towns have a store, making it easy to systemize your purchasing if you own more than one or two rental units. I've also found that Home Depot's carpet and tile selection is just as good as what you'll find at high-end shops.
The B-Level Rehab
These properties are located in better locations - not the best, but better than your C-Level Rehab. Your potential renters are stable people with jobs and may be potential lease-to-owners or they're renters who will stay awhile and pay their rent on time every month.
For these properties, you'll want to do all the basics outlined above but with a few upgrades, such as installing tile floors versus linoleum, using custom paint throughout the property, retiling the bathroom, installing draperies, replacing an old stove, etc.
A-Level Rehab
The properties are located in desirable communities, and if in excellent condition can demand higher rents. You'll be able to rent these properties fairly quickly, too.
When doing a rehab, you'll do everything outlined above with any additional detailing to give the property that extra "oomph," such as installing closet systems or high-end carpets and fixtures. Also consider rehabbing these properties into condos - once the market turns, you can then sell the rental units as condos.
Working with contractors
Before hiring a contractor, you'll want to ensure that they have the proper licenses, insurances, etc. (don't go with the cheapest contractor as he will most likely be uninsured) and make sure the contractor's insurance covers "incidents" due to faulty work - such as burst pipes or electrical fires - and on-the-job accidents.
You'll also want to ensure your contractor is on the same page as you with regard to the level of rehab you're looking for. Most contractors understand a "condo quality" rehab versus a "make ready" rehab.
It's a great market right now and if you've always wanted to own rentals, now's the time. To ensure positive cash flow, run your numbers four and five times, know which type of renter you'll be attracting and the rents you can charge, and work with a contractor who understands what you're looking for.
This type of rental property is generally geared to Section 8 renters - those who receive assistance from the government - and it's the type where you want to do the least amount of work while still meeting government regulations for Section 8 housing.
Any major issues with the building, including structural, windows, pests (bugs and rodents), and mold, will need to be fixed and pass inspection. You'll also want to inspect all fixtures. My goal is try hard to keep existing kitchen and bath fixtures. If you do need to replace anything, don't go for the cheapest replacement as the item will need to withstand wear and tear by tenants.
You'll also want to make the units look nice by adding a fresh coat of paint, replacing torn or dirty shades, steam cleaning (or replacing) the carpets, refinishing the floors, and replacing counter tops if necessary.
Home Depot is a great place to shop because 1) they have merchandise that ranges from low-end to above middle grade, and 2) most towns have a store, making it easy to systemize your purchasing if you own more than one or two rental units. I've also found that Home Depot's carpet and tile selection is just as good as what you'll find at high-end shops.
The B-Level Rehab
These properties are located in better locations - not the best, but better than your C-Level Rehab. Your potential renters are stable people with jobs and may be potential lease-to-owners or they're renters who will stay awhile and pay their rent on time every month.
For these properties, you'll want to do all the basics outlined above but with a few upgrades, such as installing tile floors versus linoleum, using custom paint throughout the property, retiling the bathroom, installing draperies, replacing an old stove, etc.
A-Level Rehab
The properties are located in desirable communities, and if in excellent condition can demand higher rents. You'll be able to rent these properties fairly quickly, too.
When doing a rehab, you'll do everything outlined above with any additional detailing to give the property that extra "oomph," such as installing closet systems or high-end carpets and fixtures. Also consider rehabbing these properties into condos - once the market turns, you can then sell the rental units as condos.
Working with contractors
Before hiring a contractor, you'll want to ensure that they have the proper licenses, insurances, etc. (don't go with the cheapest contractor as he will most likely be uninsured) and make sure the contractor's insurance covers "incidents" due to faulty work - such as burst pipes or electrical fires - and on-the-job accidents.
You'll also want to ensure your contractor is on the same page as you with regard to the level of rehab you're looking for. Most contractors understand a "condo quality" rehab versus a "make ready" rehab.
It's a great market right now and if you've always wanted to own rentals, now's the time. To ensure positive cash flow, run your numbers four and five times, know which type of renter you'll be attracting and the rents you can charge, and work with a contractor who understands what you're looking for.
Michael Schneider is the President of Bi-Coastal Development, Inc., a West Roxbury, MA real estate development firm specializing in rehabilitating undervalued properties in good neighborhoods. Michael can be reached by email at Michael@bicoastaldevelopment.com, by phone at 617-224-8593, or via his website at www.bicoastaldevelopment.com.
Thanks for the great article. Question: what are the major rehab projects that are relatively inexpensive yet a newbie would shy away from? For instance, I was told a foundation problem is not a big deal but people immediately assume it's a huge issue and an expensive one. Thanks again. DMR