There always seems to be this ongoing debate on real estate forums about DIY (Do it yourself) investing vs full service investing (also known as turnkey investing). The argument goes something along these lines. The turnkey provider is ripping off their customers because they are selling their property at market value to an investor when that same investor can go and do it themselves, not having to pay any profit to the turnkey provider. My response: They are right. There is no question that someone can go in and do the same thing that we are doing.
For the most part, there is nothing proprietary about it. It’s a simple formula: Find a distressed property, rehab the property, rent it out, and manage it. That’s all there is to it. If you have the time, energy and money to do it; then you should. But before you jump into doing it, I want to point out the possible pitfalls.
Find the distressed property
As an out of state investor, I have no question that you can find a distressed property on Zillow or Trulia. The secret to this is being able to pick the right neighborhoods. As part of your due diligence, you need to find someone who knows these neighborhoods intimately, block by block. Typically that person is not the realtor.
TIP: You need to get down and find either an engaged property manager in that neighborhood or talk to people in the community.
Years ago, we made bad purchases. We got excited about the numbers on paper. We thought that we would be able to rise above anything that was going on. We couldn’t. We ended up selling those properties at a loss because they were too much of a problem. We couldn’t find good tenants. The neighborhood was dangerous. It wasn’t worth dealing with it to make a few hundred dollars a month. We cut our losses and moved on. If you are only going to buy a few properties, you don’t have this luxury to be wrong very often.
TIP: Make sure you know what the neighborhood and the block you are buying in is like.
I used to love the show “Flip this House.” They made it look so easy. And really it is…after you have done 50 of them. The first 50 are hard. What is the RIGHT scope of work? How much should it cost? Did I miss anything? How big of a deal is (fill in the blank)?
Rehabbing a house is easy. It just takes time to figure out the whole process. And while you are figuring out that process, it costs money.
I think scope of work and cost go hand in hand. You have to come up with a scope of work first. New rehabbers typically over improve. They spend money on things that provide little or no return because that is what they would want if they lived there. The most difficult aspect about scope of work is that you won’t know if it was correct until tenants live there. For example: if you don’t already know, you can’t find out that the carpet in rental properties doesn’t last until you’ve replaced it 3 times after 3 turnovers.
TIP: When you put together your scope, make sure a seasoned landlord is helping you and focus on things that are most important and long lasting.
As for estimating the rehab cost, you can read The Book on Estimating Rehab Costs by J Scott. It breaks down your cost by job. The only catch here is that you need to be able to find the contractors that are willing to do it for that price. You typically don’t find those contractors advertising in the yellow pages or online with a website. 60% of our contractors probably come from a referral of some sort. The other 40% come from driving around and talking to contractors that are working in our neighborhoods.
Tip: When you see contractors working, stop in and see their work and ask them a few questions about pricing. This way you will already have an idea if their pricing will be ok and what the quality of the work will be. Also you need to keep in mind that in some spots, they can give you a range of prices and that range can be large.
We had a single family home that we were going to do a full rehab on. It was a small house, just around 900 sq. ft. We got some bids on it and our prices for labor were in the range of $15,000 all the way up to $39,000.
Tip: Ask the contractors to break materials out separately. This way you can get apples to apples comparison. If you look at just the bottom number, you may not realize that the contractor might be using subpar materials. [Click here to read More….]
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