So, you just closed on a great rental property for 60 cents on the dollar. You’re ready to start rehab and get some tenants in there, but now you have some critical decisions to make:
- What stays?
- What gets fixed?
- What gets replaced?
The answers to these questions depend on several factors and circumstances, such as:
- current condition
- available rehab budget
- replacement time frame
- season
Generally speaking, you’ll want a fresh coat of paint throughout the interior, and the carpets will either need to be cleaned or replaced. A cursory look at the walls and floors will tell you how to handle these components. Both walls and floors should be neutral colors to accommodate the different styles your tenants may have.
But what about the roof, or the HVAC unit? These are a little more costly to replace, but also more devastating should they fail to perform their expected roles.
Let’s say the roof is 20 years old and looks like it might need to be replaced. If the roof isn’t leaking, then it does not require immediate action. If it is leaking, you can always patch it until it absolutely needs replacing. If you think it needs to be replaced, call 3 roofers out to the house to assess the condition, give you their opinions, and offer estimates for repairs and/or replacement. (THREE IS KEY—for any work you want done on the house, until you have a solid list of vendors you trust.) Obviously, if all 3 tell you the roof needs to be replaced last week, then you’d better take care of it now. But what if they think it needs replacing, but you have some time before it’s critical. Think about the following to determine whether you should do it now, before your tenants move in, or wait until it’s really needed:
- Budget/Funds – Is it within your rehab budget to do the repair now and still have the cash flow you intended? Do you have the funds available now b/c you used Hard Money to purchase the property and make repairs? Are you cash poor? Would you have to borrow more money or use a credit card to get the job done?
- Timeframe – Will doing the work now significantly delay getting the house make-ready? Will it substantially delay collecting your first rent check and cut into your profits? If you wait to do the job, how long will it take to get someone out there to do the work when necessary? Will your tenants be able to stay in the house while the work is being completed, or will you need to provide alternative accommodations?
- Season – If hailstorms and tornadoes are right around the corner, you might want to wait. Your new roof could incur damage and have to be repaired anyway. Plus, the current roof could incur enough damage that your insurance company will pay to replace it for you!
- Other options – Can you afford Home Warranty insurance to be there for when the repair must take place? Or, is the current roof (or A/C, or other item) currently under a transferrable warranty that you can take advantage of?
As you can see, you have a lot to weigh before giving your final answer, but it’s nice to know that you have some options available to you. This type of analysis should be applied to any of the costly make-ready options you are considering. In the end, make sure you are still going to have decent positive cash flow on the property and happy tenants who will want to stay and take good care of your house!
Please share some of your rehab decisions and advice for other real estate investors.
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