The Rehab Process

General Real Estate Investing
1

I’ve given a lot of thought over the last few months about financing and leverage as it relates to REI, but now want to turn my attention to the rehab process. My basic goal is to acquired distressed properties at a steep discount and then rehab for one of two reasons.

People talk a lot about exit strategy, and my gut feeling is that this is probably the best starting point. My basic interpretation of exit strategy is:

a) whether you’re going to just rehab and sell for a short term gain
b) rehab and hold for long term cash flow and equity

In either case, once the deal closes, you’re under the gun. Your holding costs begin and choices have to be made as to the grade of materials and the extent of rehab to be done.

Then there’s the whole issue of doing it yourself and/or hiring subcontractors.

If anyone has any good books and/or videos to recommend, I would appreciate it.

Also, your own comments on how you approach rehab relating to each of these exits…is most appreciated.

Thanks,
-Mike

2

In either case, once the deal closes, you’re under the gun. Your holding costs begin and choices have to be made as to the grade of materials and the extent of rehab to be done.
Choices as to the extend of the rehab and quality of materials along with hiring contractors should be done before you close.

With the exception of commercial properties, I always choose option A. Short term gain is essential on a rehab to make the most money. The forced appreciation you create is better spent on more forced appreciation than it is sitting, generating rent.

If you take the same money you used on your first rehab, combined with the profit you made on the first sale and compounded the same money on 10 more rehabs in that year, your rate of return would be enormous compared to annual rent.

Say you have $50,000 equity in a rehab and rent is out for $500 more than your debt service every month. You’d make $6,000 a year on your equity. If you cashed out that $50,000 and put it into another rehab that made $50,000, you doubled your money in say a month. Now keep doubling that profit every month for the rest of the year and you make $102,400,000 by the end of the year. Ofcourse this is simply an example but you see the point. Your equity is better spent making more forced appreciation than it is making rent.