4 Ways to Optimize Your Rehab for Maximum Profits

Choosing what to include and what not to include on a rehab job is just as crucial as choosing the right contractors. Some work is obviously necessary (repainting a weary house), while other updates are more elective. When it comes to discretionary work, there are some improvements that are worth the bang for the dollar and you will find others that most surely are not.

Here are the key things to create your own “Do Not Do" list in regards to rehabbing investment properties.

Value Driven Fixes

In 2003, the National Association of Realtors came outside with a study about the features that increase and reduce the price of new housing (assuming all other attributes, i.e. square footage, stay exactly the same). In order of value:

  1. Full Bathroom: +23%

  2. Partial Bathroom: +15%

  3. Garage: +13%

  4. Central Air Conditioning: +12%

  5. Fireplace: +12%

  6. Basement: +9%

  7. Close to Golf Course: +8%

  8. Higher Ceilings (9 Feet): +6%

  9. Additional Bedroom: +4%

  10. Laundry: +2%

  11. Above-Ground Swimming Pool: 0%

  12. In-Law Suite: -5%

  13. Professional Office: -5%

Some of those characteristics are obviously likely to have different effects in various areas as well. So, by way of example, a garage at a city that has a high walk rating is most likely not as precious as in a town which has a very low walk rating. A cellar in a place with a high water table which would frequently flood is not likely to be especially desirable. Central A/C is going to be considerably more precious in a place like Birmingham, Alabama than in San Diego, California.

That being said, some renovations are nearly always a bad idea. In-law suites and professional offices would be just two of these. CostAdvisor.com sets the cost of a normal garage conversion nationwide at $11,154. I believe that's large, but it still costs quite a bit (particularly to get it done right, as many garages are not insulated, for instance ). On the other hand, adding a bedroom to go from one bedroom to 2 or from two to three (usually the tiniest a household would consider) could be well worth it. It's rarely worthwhile to do this over three bedrooms unless your home is very large.

Like with most things, there are some exceptions. Most especially is student housing, which is leased from the bedroom. In that case, the more bedrooms, the higher your lease. So locating any nook and cranny you can to become a bedroom makes sense. But in general, adding bedrooms beyond three isn't worth the price.

Fixing a Real Estate Up Too Fancy

Another common mistake investors make is mending a property too much. If you're fixing up a lavish house to flip, then you need to go all out. But most rentals, especially working and middle class leases, do not require anything near that. They need to be nice and operational, not spectacular. Builder's grade carpet will rarely last more than one twist, and good luck getting any mark off in the event that you use paint. However, You also don't need to go all out with things such as:

  • Engineered stainless steel appliances

  • Custom cabinets

  • Granite slab counter tops

  • Bay windows

  • Elaborate crown molding

  • Expensive chandeliers

High-end materials will not add considerable rental or resale value to a middle-of-the-line property. They are not worth the costs. But inexpensive materials will immediately break and require frequent fixing. Aim for the"Goldilocks zone." Not cheap, but not too expensive either.

Awkward Additions or Updates That Don't Fit the Property

For the most part, it's probably best to refrain from adding additions to a home in general. In addition, it is rarely worth finishing a basement. Your “finished” basement may in fact be full of mold along with the bottom half of the drywall being torn out due to flooding issues.

In the same vein, I have seen a good number of “additional bedrooms" which are only accessible through another bedroom. This doesn't count (legally or otherwise) as a bedroom. (A bedroom should be at least 100 square feet). Counting those rooms as "bedrooms" frequently just turned off prospective buyers or renters when they really see it and it reduces your odds of getting it rented or sold.

If you've got a big, multi-story house without a downstairs bathroom, adding a half bath is almost certainly something you'd want. On the flip side, if you've got a multi-story home where each bedroom is upstairs and it has a half bath downstairs, then you could be tempted to create that half bathroom into a complete bathroom, but you shouldn’t. But why? People generally aren't going to take a shower on a different floor in relation to their bedroom unless they need to.

If a house has a dingy cellar and that's where the laundry is, it's probably worth trying to make that a laundry room. I'm not fond of garage conversions, however if you're considering one, you should think about whether the house would have no storage. If the house has no basement, converting the garage pretty much removes whatever storage the house once had. People have a whole lot of things these days and need somewhere to place it.

So be sure to ask yourself these questions and put together a scope of work depending on the answers.

Upgrades Which Are Mostly Only a Headache

Some upgrades are fine, but are usually only a hassle, particularly for rentals. Skylights look nice, but they're notorious for leaking when it rains. I would not advise placing them unless you're dealing with a luxury property. Swimming pools also generally fall in that class.

As noted previously, the National Association of Realtor's study discovered that adding a pool provides a whopping zero percent to the sales price. And pools are not cheap to include. In addition, if you are renting out the house, there are a great deal of arduous laws and liability problems regarding swimming pools nowadays. That being said, there are some exceptions, obviously based on geography.

You may earn your money when you sell or rent, but you can lose it at any phase of the procedure. And the most common place that investors turn a great deal into a bad one is using a botched rehab. Finding good contractors and handling them well is essential. Nevertheless, it is crucial to compile a good scope of work.