Latest / Cash Flow for Life / Chapter 14: Repairs, Renovation, and ARV
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- 00;00;00;16 - 00;00;31;02 Chapter 14 repairs, renovation and ARV. Some of the best deals out there for rental homes will be houses with minor problems and repair issues. Some may be in good repair but have functional obsolescence issues. That's when the floor plan or certain areas have become outdated and are not the best for today's living and entertainment preferences. Appraisers adjust property values down for functional obsolescence. 00;00;31;04 - 00;00;58;06 An example might be a small formal dining room. If a wall is removed, it could open up that area to the kitchen or living areas, or even join the two. This fits much more with today's lifestyle and the expectation of a buyer. While repairs to correct livability problems will probably require immediate action. Renovations may be something you want to do in the future to increase the value of the property. 00;00;58;08 - 00;01;30;19 There are two property condition values used by investors the as is value and the after repair value, or a r v wholesale property. Investors or fast flippers are concerned only with the as is value of the property, and whether they can flip it to another investor for a profit without doing any work on the house. Other flippers like to buy fixer upper properties, do the work, and then immediately sell them for profit based on the RV of the home. 00;01;30;21 - 00;02;02;00 Still others, including us, will hold the property as a rental, but my still want to purchase a home in need of repairs or renovation. Foreclosure properties can present some of the best values out there, but they will frequently require some amount of work and this can sometimes be major work. DIY do it yourself. We are a couple of guys who like to get our hands dirty, especially when it saves us money while increasing our ROI and cash flow. 00;02;02;03 - 00;02;24;06 So when we started, we did a lot of our own repair and minor renovation work on our properties. In some cases, we even acted as the general contractor and put some subcontractors on the job. If you're handy this way and have the time, this is often the best way to maximize the value of the property at the lowest cost. 00;02;24;08 - 00;02;45;10 Sweat equity is the term for doing the work yourself. You're increasing the value of the house with your own work, which increases your equity right away. Hiring out the work. If you don't know the front end of a hammer from the back end of the shovel, then you'll want to hire professionals for repairs and even minor renovation work. 00;02;45;12 - 00;03;07;08 Even if you do have the ability, you may not have the time. Whether you're doing some or all of the work yourself or simply hiring it out, you'll need to determine the cost to complete it and the value of the home. After the work is done, figuring out the after repair value is actually the easiest of the two jobs. 00;03;07;10 - 00;03;33;26 The accurate estimation of the cost is every bit as important, and is actually a little bit of a trickier task. AR v for the rental property buyer. Rental property investment ROI has two components the cash flow and the equity increase over time. Equity can be increased quickly with repairs or renovations, and that's what we're dealing with in this chapter. 00;03;33;28 - 00;04;03;16 It's great to be able to buy a house and immediately put in a tenant and create positive cash flow. However, some really good deals will require at least some repairs before move in day. If you purchased a home at a significant discount due to the condition and need for repairs, sometimes extensive, then you will have added value. Once the repairs are complete, you'll recognize possible future improvements or renovations that will increase the property's value and cash flow through higher rents. 00;04;03;19 - 00;04;30;04 You may see great potential at the time of the purchase, but you hold off doing the work until after you've rented it out for a while. After repair, value is simply defined as the value of the property. After the work is done. Whatever you see that must be done or could be done to improve the property is considered and the value is calculated for the house as if the work is completed. 00;04;30;06 - 00;04;59;23 The good news is that you know exactly how to do this from what you learned in the Comparative Market Analysis chapter. All you're doing is a semi that considers the property to be already repaired or renovated. You select comparable sold properties and make your adjustments as if the home were in the repaired and renovated state. Let's go back and refresh your memory about the CMA, because it's the best way to assess the RV of a home. 00;04;59;26 - 00;05;28;12 Why bother to do this if you aren't planning on doing any renovation? It's because today's plan is tomorrow's old plan. You can't anticipate what it may be in the future. We're long term investors for cash flow while we'll do the necessary repairs to get the home occupied. And they may add value immediately. We also may recognize opportunities for renovations or more extensive work that will increase the value and equity down the road. 00;05;28;15 - 00;05;55;27 Changing market conditions, such as a new high tech employer moving into the area, could be the impetus for a remodel or a simpler renovation. Changes in the demographics of our tenant pool could bring about a desire to change up the property a little bit. Earlier in this book, we mentioned large houses and how there may be an opportunity to make changes at entry entryways or divide a single property into two rental units. 00;05;55;29 - 00;06;15;15 This increases cash flow and the value of the house. If our tenant pool is moving from families to young professionals, this type of renovation could be quite profitable for cash flow reasons and it will increase the value of our home, our equity, and ultimately our ROI. 00;06;15;18 - 00;06;40;09 Equity for future business growth. We're in this for the long haul and for lifetime cash flow. Reaching financial independence will happen when we grow our holdings to exceed our cash flow needs. And then we can move on to the next level. This requires financial leverage and there's opportunity in property improvements. We discuss the appreciation of a properties value over time. 00;06;40;11 - 00;07;06;06 However, an immediate infusion of value from renovations can speed up the process a lot at some point. By coupling normal appreciation with renovation over time, we can build a nice pile of equity against which we can borrow to fund other purchases. We call this appreciation over time passive appreciation, and we call the increase in value through renovations. Active appreciation. 00;07;06;09 - 00;07;37;18 Converting a basement to a tenant space is an excellent example of multiplying the value of existing square footage for equity and cash flow. Adding the value of the improvements to the value of the extra cash flow will free up leverage to add to our rental property inventory. Time to buy another one. Accurate cost estimation is critical. Doing a CMA that considers the property in its after repair value state is the easy part. 00;07;37;21 - 00;08;03;23 However, it just starts as a plan when you want to buy a property for, say, $150,000, you believe you can renovate or repair it for $20,000 and anticipate in a R-V of $200,000. It's not a reality unless you can make the cost numbers work. In stage three of Building Your Success Team. You'll be selecting contractors for major repairs and renovation work. 00;08;03;26 - 00;08;30;00 Right now, we'll just refer to them as well as the help your handyman can provide in estimating the less extensive work. When couples renovate their own homes, cost overruns overages are almost a cliché or a bad joke. Divorces over these projects are legend, and movies such as The Money Pit starring Tom Hanks are fun, though painful to watch. 00;08;30;02 - 00;08;59;14 The last thing you want is a money pit. What you do want is a final result that's on or under budget. This requires attention to detail, using your team members properly, and the use of other material, labor and renovation. Estimate resources using your team. Of course, the busier you are, the more you're going to rely on your success team members to pull together this type of data for you. 00;08;59;17 - 00;09;21;13 However, it is critical to your success that you understand how it's done and where to find and verify the information. There should also be consideration for your team members. If you're evaluating a dozen deals every month or so. It helps to be able to do basic estimates to focus on the ones that are more likely to be feasible. 00;09;21;16 - 00;09;46;17 Calling up your contractor several times every month to do detailed estimates for deals that likely will never happen could cause you to have to find another contractor. RV and costs go together. In this chapter, you've learned that AR v can't stand alone. The cost needed to get there must be accurately calculated. Or you could end up with that money pit. 00;09;46;23 - 00;10;22;04 Or at least a small money pothole. Action. Steps one. Start compiling and bookmarking online renovation cost calculator resources. Two. Run through some sample projects to become familiar with the way they work. Three by a renovation book. If you want a print resource to refer to on site. What's next? We're ready. In the next chapter, we'll go out and actually look for our rental property.