It can be difficult to calculate an accurate budget for rehab, especially if you are unfamiliar with the differences in rehabbing for a flip versus a rental property.
To help you determine your rehab budget as accurately as possible, we are going to show you the major differences between rehabbing for a rental versus a flip property using an actual example of a rehab we successfully completed for a client of ours.
Buy-and-Hold Strategy Rehab
If rehab for a buy-and-hold strategy were a human being, it would be a minimalist. It’s that simple to understand – you basically want to make minimal repairs to save on cost, but you still need to attract renters. More renters means that you can command higher rents and therefore increase your returns.
How you do this is by making strategic repairs that balance your renter’s livability and your profitability.
Common Repairs for Buy-and-Hold
- New or touch-up neutral paint on all exterior and interior walls (depending on current condition and color). Staying in a neutral palette means attracting a wider pool of renters.
- New standard appliances for refrigerator, range, and hood range, if current appliances cannot be salvaged or aren’t matching in color.
- Replace any broken cabinets, knobs, and/or handles.
- Depending on condition and/or location of property, may need to update to carpet in rooms and wood vinyl for entry way and other high-traffic areas.
- Clean up of front and backyard. Light landscaping if needed to increase curb-appeal.
- Replace any broken or outdated blinds and door coverings. All windows should be able to lock for the renter’s safety.
- Make any and all updates that require your property to pass safety regulations.
- Water Heaters
- Depending on the age of the water heater, the water heater may need to be replaced. We use the following rule: 7 years in age or have less than 3 years before useful life expires, then it needs to be replaced.
Typical Cost for Buy-and-Hold
The typical cost of a buy-and-hold property rehab starts around a thousand dollars and can go up to a couple of thousand dollars. This number varies based on a number of factors, such as location of property, vendor’s pricing, and property’s current condition.
For instance, if your property is located in a more upscale part of town or neighborhood, you may need to upgrade your amenities to compete with what is currently on the market for renting. Since renters will expect high-quality appliances, you have to deliver, in order to avoid vacancies. “Investors must remember that it’s not just about cutting the rehab cost as much as possible, it’s also about making necessary updates to attract renters, because a vacant rental property literally supplies no cash flow,” Karla Rivas, HomeUnion Asset Management Manager, adds.
The key to keep cost down on your rehab is to do your due diligence on the market, neighborhood, and property as well as keep an extra budget for unplanned emergencies.
Actual Rehab Example
Here is an actual rehab that was completed by our Asset Management team, spearheaded by Rivas, to show you an example of a successful buy-and-hold rehab. The cost of this rehab in North Carolina was at less than $6K, and the investor collected the projected rental amount right away.
As you can see from the photos, this rehab had minimal repairs to help enhance its renter potential. Repairs included painting the front door, new refrigerator and stove, final cleaning, and other small miscellaneous items like new toilet seats, lock sets, and screen replacements.
These standard updates worked successfully as the investor received the full rental projection of $750, which is on the higher range of our projections.
Flip-and-Fix Strategy Rehab
Unlike buy-and-hold, fix-and-flip rehabs tend to border more on the lavish side as an investor is hoping to attract buyers and recoup the cost of rehab through the sell of the home.
Rehab updates are therefore evaluated on a different scale then buy-and-hold. The strategy for the fix-and-flip investor is to only make updates to the home that will increase the value, and therefore command a higher home price.
How this is done is by evaluating the property on a case-by-case basis to others in the area, and strategically calculating what needs to be done to increase the home value.
Common Rehab Repairs for a Fix-and-Flip
- Granite or equivalent stone countertops
- You have to create that “wow” factor when a buyer walks into the home.
- Wood or stone floors
- The key is for the property to look more expensive with higher-end finishes.
- Kitchen Remodel
- From cabinets to appliances, depending on the area or current condition of the home, you may need to make a whole kitchen remodel to demand a higher home price.
- Master Bathroom Remodel
- Depending on the area the home is located and current condition of the property, a master bathroom may need to be fixed with new cabinetry, tile/stone, and modern shower.
- If the property is an eye sore, you may need to do heavy lifting on the landscaping and/or backyard to entice buyers.
Typical Cost for Fix-and-Flip
The typical rehab cost for a fix-and-flip can range anywhere to a couple of thousand dollars to hundreds of thousands of dollars, says Mike Lacava from BiggerPockets. The reason? You want to entice buyers to pay a higher home price than what you originally paid plus the cost of rehab, so larger renovations need to be made. These renovations come with a heavy price tag from contractors and typically are more expensive than rehab for buy-and-hold properties.
Rehab is just one important area that differs based on the strategy you are deciding to implement for your real estate investing. Before you decide on which strategy is right for you, it’s essential that you understand all the differences involved with fix-and-flip and buy-and-hold strategies. For a more comprehensive list, head to our other post Buy-and-Hold Versus Buy-and-Sell.