Maximizing Profits in Rehab Investments: Learn about the lucrative world of rehab investments with expert insights on transforming properties for maximum profit. Learn key strategies for selecting homes, optimizing renovations, and leveraging loans to earn equity upfront. Discover how to navigate the rehab process, from securing bids to finalizing appraisals, ensuring a solid ROI. We offer real-life examples. So whether you are flipping or renting, find out how to make informed decisions and partner with the right professionals for investment success.
Brett
0:00:31 – All right, let’s go into this topic, the rehab side of things because we do a lot of turn key, we do a lot of new construction. We also do rehab projects. We do have rehab investors. We spoke earlier of one that has been very successful with his model of, so he’ll send me a property, the cash flow looks good, you know, it hits the 1% rule starting out, and he’ll say, okay, well, what do you think this house will be worth if I get it to the next level of remodel? You know, I go in and put some new countertops, new bathrooms, whatever. Let’s say the house is listed for $70,000 and it’s got a CMA value of $120,000. And he immediately tells himself, okay, well, let’s get a bid from Nick on the rehab. That’s going to be a $30,000 rehab. Okay, well, then I’m all in at $90,000 with a value of $120,000. 80% of $120,000 is what? Anybody good with math? Come on, you’re British, you know math.
Jerry
0:01:35 – $96,000.
Brett
0:01:37 – So 96,000 is 80% and he’s all in at 90. So he’s got a $6,000 spread in that property. Probably would want it to be closer to 10. So what his deal is, is he’ll go to the bank, do a subject to loan. They’ll do a subject to appraisal, say it’s worth 120 when you’re done with all this work you tell us you’re going to do, and we’ll loan you 80% of that. So he’ll borrow $96,000 against that house, put six in his pocket, rehab the property, and then put a ten in it, producing cash flow. His philosophy is earn your profit up front, and he does it through the loan process, basically. Now if the bank says, we’ll give you 90,000, he needs 96, he’s not going to make any money on it, he will just walk away, even though it may produce an 18% ROI. He doesn’t care about that. As long as it will cash flow, and he can make profit out front. He gets his profit out and he mentioned that in his podcast about making your money out front.
Sponsorship
0:02:31 – We are sponsored by Title Assurance and Escrow, a title company here in Cordova that does all of our closings, title work, escrows, and we only use Title Assurance and Escrow. That relationship is very important because we can get things done for our investors quickly and easily. So to speak with Title Assurance and escrow, call 901-737-3332. Ask for Chris or April.
Brett
0:02:58 – Let’s give a real case scenario, Nick. Let’s pick up one of the houses we did for Daniel.
Nick
0:03:01 – Kipling.
Brett
0:03:02 – Kipling, okay. So Kipling, I think he paid 68,000 or 70 grand for that house. How much was the rehab?
Nick
0:03:10 – I believe it was, if I remember correctly, 25 to 28,000, somewhere in there. But it was all new flooring, interior, exterior paint, new HVAC condenser, countertops, appliances. I mean, it was not a full gut rehab, but it was, I would call it an overhaul.
Brett
0:03:30 – Okay, so if I remember correctly, they were asking $80k. We ended up getting it down to like 70 because of the amount of repairs needed to get it up to that level that you provided, Daniel went to the bank and said, okay, it’s worth $135,000 when I’m done. And the bank then says, okay, we’ll loan you 80% of that. So he’ll do the loan, get the funds, hire Nick to do the work, take his draws, and then he’ll either make his money on that initial construction of 10,000, $15,000, put that in his pocket, and then he rented it for $1550 a month so the ROI was fantastic. The other side of that he can just go ahead and buy the house, pay for the rehab out of his own pocket and then refinance up to 80% of the appraised value once done. One half-dozen does and the other. If you can make your money up front on the deal, do that. If you have to wait and refi once you’re done, do that. It really comes down to your lender. But in that scenario that’s an average case. $70,000 purchase, 2025 grant rehab, increase the value by about $35,000, he was probably able to pull about $15,000, $18,000 in profit out of that house from the get-go. So he’s all in it, 80% of $135,000 with a $1550 rent. You can’t go wrong with that. That is a solid deal from start to finish. But you’ve got to run your numbers correct because some of these guys will say, oh wow, I can buy this house for 70, but 25 minutes we worth 135. I can take out $50,000 or 40,000. No, no banks going to loan you a hundred percent of value, but if you can pick up 10 grand up front on that deal and pick up 1550 a month rent on a house that you’re all in at whatever 80% of 135 is, that’s a hell of a deal. That’s a smart way to invest. It’s a safe way to invest because worst case scenario, he gets in trouble. He can just sell the house for 130 grand with a $1,550 a month tenant in it. Investors will buy that all day long. So he could walk away and get his additional funds out right away if he had to. Now, the trick is if that model does not work on a deal that we’re looking at, he just walks away and goes to the next one. He doesn’t try to put a square peg in a round hole. It doesn’t fit my formula, move on to the next one. So him and I are constantly looking at properties. He’s sending me stuff every day. And nine out of 10 of them, the formula just doesn’t work when I run the ultimate end result CMA value of that property in rent comps.
Nick
0:05:46 – Well, and that’s something else though, that as an investment team, we have to offer to our clients is that we can go look at a house and tell you, you know, how much it’s gonna cost to do this rehab work, whether we’re doing the work or not. The one for Emily, for instance, Lindemere. I mean, that’s, I’m not doing the work on that. We don’t have anything to do with that work. We’re just representing her to sell the house. But I’ve been out there probably 10 different times checking in on it, just seeing where progress is.
Brett
0:06:09 – By the way, what happened with the window situation? I was wondering about that today.
Nick
0:06:13 – Brought it to her attention and she’s just kind of waiting to see what exit strategy she decides on.
Brett
0:06:19 – So, let’s talk about that. How much money did she put in that house? We didn’t do the rehab. This investor bought this home, hired a contractor to do the rehab to flip, then after all that started ended up hooking up with us, right? And so we’ve kind of… To sell the house. Yeah, to sell the house. So we’ve kind of been holding her hand, guiding her through it. Nick’s been out checking the jobs, trying to give her some advice on things to do, not to do. One of the things that he noticed was that they put in where there was once…
Nick
0:06:45 – It was a large slider window in each bedroom.
Brett
0:06:48 – And they just put two small windows in, which don’t meet code for egress.
Nick
0:06:51 – They don’t meet code for egress. So according to Shelby County Code and FHA guidelines, it does not meet.
Brett
0:06:58 – And potentially MHA. You may have trouble getting an MHA tenant approved for that house.
Nick
0:07:02 – So technically, according to them, those bedrooms are not classified as bedrooms because they don’t have egress windows.
Brett
0:07:07 – So it’s just one giant eight-room house.
Nick
0:07:10 – So they basically put two small, single-hung windows in place of one slider, obviously, because they were cheaper and probably got a good deal on the windows. So saving some money here without knowing the potential ramifications down the road
Brett
0:07:22 – when she goes to sell the house. And potentially at this point, she’s going to have to get a self-paid tenant, probably won’t get above-market rent that she anticipated to get that higher sales price, and it’s going to affect her profitability if she makes anything at all. Very good. She may have to dump it because someone’s going to have to go in there and readjust those windows, put in either larger slider windows or open the wall up and put in larger egress windows.
Jeff
0:07:47 – Why doesn’t she fix the windows?
Brett
0:07:49 – Because they’re already in. It’s already framed. I mean, it’s done. It’s brick. It’s drywall that’s painted. The windows are in.
Nick
0:07:54 – And I want to say she’s into the rehab for around $45,000-ish. She’s just tapped out. She doesn’t want to spend any more money on it. Yeah, I think Make her numbers not work. So what Brett and I discussed we got a house. You can’t sell though. Well, it’s good
Jeff
0:08:09 – She can’t sell, though.
Nick
0:08:11 – It’s going to limit her buying pool. It’s not gonna go it’s gonna take her out of the owner-occupant Potential to sell the house because typically an owner-occupant in that neighborhood is going to get an FHA loan FHA will not pass that house because it doesn’t have the aggressive one.
Jeff
0:08:25 – So I’m assuming the contractor is not taking responsibility for any of this.
Brett
0:08:31 – Apparently not. Apparently he shortchanged somebody.
Jeff
0:08:33 – Or he may have just or he could have done what she told him to.
Brett
0:08:36 – I don’t know who the contractor is. Do you?
Jeff
0:08:38 – She could have told him to do it.
Brett
0:08:40 – Who knows? Well, but she may not have known any better. But if you had talked to Nick or me and we would have helped you buy that home and helped you with the rehab bid, we’d have told you flat out that, hey, this is a great owner-occupant scenario. You can make more money if we sell it to an FHA buyer versus putting a tenant in and sell it to an investor. But to do that, here’s the extra cost you’re looking at. So you’re going to put an extra 10 grand in windows to make it work, but you can pick up another 20,000 in profitability or 25,000. Those are things that a lot of investors, out-of-town investors get sneered in because they trust people here to do the right thing and let’s face it, most people don’t.
Nick
0:09:18 – Well, something else that regarding this specific house could potentially be an issue is the driveway that…
Brett
0:09:23 – There is no driveway. It’s pretty much…
Nick
0:09:25 – It’s washed away up against the house. Well, MHA will not rent that house with a driveway like that. So that’s just another added expense.
Brett
0:09:34 – 300 BC cobblestone now. Another eight or $9,000 to dig that out and re-do the report?
Nick
0:09:37 – Potentially. If you were to re-do the whole driveway maybe sure but that’s because we weren’t involved early on in the purchase process and the bidding process to you know really have a stake in that
Brett
0:09:43 – Wwe’re left to clean up the mess I really would be curious to find out who that contractor was if you could find so at the end of the day if you guys had been on the front end and giving her a price she may not have purchased this home because the cost may have been that may not even work work for her to begin with. Now at this point, I think Nick and I’s goal is to get her out of it as best we can, try to put some money in her pocket and move her. I think at this point now, she knows that we’re the real deal, right? We’re going to look out for her. So I think at this point, we need to get her out of this. Hopefully, she doesn’t lose anything and move her into the next phase of what we do and that is helping her find the property, evaluate the property, get a good solid bid, understand if it’s going to go on a rock or if it’s going to go investment renter, and also understanding what has to be done to that property to qualify an FHA buyer or an MHA tenant.
Nick
0:10:37 – Just like that house that we went and looked at for her the day we were riding around with Meech over in BinghHampton. You know, that was somebody had sent that house to her and said, hey, I think this is going to be a great one. This is going to be what you’re looking for. We went and looked at it and said uh-uh no go this is gonna be way bigger You know rehab budget and purchase costs, and you’re gonna be able to get out of it. So let’s walk away pull it you know pull the reins back.
Brett
0:10:56 – B but you know overall in Memphis. I would say on a rehab side Just judging for what I’ve done the last couple years 60 80 grand purchase price and a good C plus neighborhood Anywhere from you know Michael Gibson’s put in 15 20,000. I know Daniels put in as high as thirty thousand one that final number is always gets them within that eighty five percent loan to value right so they’ve got good equity position the monthly rent in cash flow exceeds one percent you know they can pull five or ten grand out of property when they refi that to me would be the average scenario in memphis i guess that you know the three one of six pick up house for 30 grand, put 30 into it, probably worth 80, rent it for 900 bucks a month. If the sun was out and there were fairies flying around and rainbows in the sky every day, then yes, that would work. But we know in the real world, that’s not how it works.
Nick
0:11:50 – Well, in almost every single property that I’ve looked at where another agent, the listing agent or the wholesaler said, it’s going to take X number of dollars to rehab this house, they’re way off. Let us look at it and tell you what a realistic number and scenario is.
Jeff
0:12:05 – So those numbers you guys just shot off, would that be good for the guy that just wanted to flip a house and sell it for profit?
Brett
0:12:12 – Sure. Yeah. Look, there’s plenty of flip opportunity, but the first part of being able to flip a property is sellability. Okay? I can get you properties all day long in 38106 that have huge profit margins, but guess what? Nobody wants to buy a rental property there, so your house is going to sit on the market and they’re never going to give you what it’s worth. Part of your strategy has to be location and market within the Memphis market. You’ve got to understand the trends of that market, the sellability of that market, the desire of other investors to buy in that market. And if it’s too good to be true, it probably is. So you take 38106 and you take 38109, they’re literally right next to each other. But if you’re on the south side of 55 there, your house is going to sell. It’s a great rental market and it carries a better value. As soon as you cross the highway, it goes the other direction. Now that house may be appraised at $80,000 and you can put $10,000 or $15,000 in it and get a renter for $900,000, but you’re going to own that as a rental property because very few people are going to want to buy on that street or in that neighborhood. While there is a good average in Memphis and it’s doable, just because it looks good on paper doesn’t always mean it’s a good deal. It just doesn’t mean that.
Richard
0:13:24 – What would be a typical time frame to purchase a home, rehab it, and find and place a tenant? And given that road map, what should I expect in terms of payments to my lender in that time?
Brett
0:13:36 – Well, let’s take this sheet that we talked about on a previous podcast as an example. Payments $110,000 house, let’s say that’s your 80% of $140,000 or $150,000 value. Your payment is $771 based on current interest rates and $110,000 value, $88,000 loan amount. With that being said, I mean, Nick, what was the average time on Daniel’s house? Four or five weeks?
Nick
0:14:02 – A typical renovation that we’re doing for what we call a rent ready or market ready, I would say could be done in a month. I think would be, you know, if you’re ordering all new windows for a house, you could have a two to four week lead time on new vinyl windows. But the majority of, you know, paint, flooring, you know, tile in the kitchen countertops, and a month. We’ve run into a couple of issues of late that have extended the time period, but that was waiting on the administrative side of MLG&W, waiting on utilities. Terry’s Vista Grand House that’s about to hit the market.
Brett
0:14:33 – It’s been what, 90 days on that one?
Nick
0:14:34 – Yeah, because we just basically waited six weeks to get utilities turned back on.
Brett
0:14:39 – So let’s just say for simplistic sake, and probably an average 60 days, from the time you close to the time you’re ready to be able to put a tenant in place. Now if you’re going MHA, add another 30 days to that because it’s going to take them 30 days to come inspect the property before the tenant can move in. If you’re going to put it on just open market and rent it, probably still another 30 days till you can get a tenant lined up, get a lease signed and they move into the property.
Nick
0:15:01 – But you know-
Brett
0:15:02 – So maybe 90 days from the day you close to having cash flow is probably a reasonable number but you need to expect four months sometimes. Maybe you can do it in 45 days. I know we have some that tenants are lined up and waiting to move in as soon as the house is done. MHA’s already got it scheduled for an inspection within a week of it being done.
Nick
0:15:19 – Well, and we know from previously working with MHA, we know what guidelines and the checklists that they’re going down so we can have all of these items prepped and ready to go before they come in to inspect so that they’re not having to do a re-inspect.
Brett
0:15:31 – You failll an MHA inspection, they’re going to give you a list of repairs. You can do those repairs that day, but it may be three weeks before they come back out and re-inspect. On the structure side of rehabbing properties, again, having an agent team that has contractors also as agent team members who are also licensed agents but also in the contracting business is a huge plus. Having management companies that understand the different markets and the management as part of our team is a huge plus. Having inspectors that can go inspect the property, give you a full 80-page report of every single thing that’s wrong with it is a huge plus because we can take that information, take the bid process and mirror them together to make sure we’re accomplishing everything we set out to do and adjust the price accordingly in renegotiating that deal to make it work. So just because it doesn’t look good on paper initially, we could finagle those numbers and renegotiate that deal with the seller to make those numbers work in our favor. And if we can’t, we just pull the plug and go on to the next one.
Nick
0:16:25 – Well, you know, and I think to add to that, talking about the construction side of things, we’re not pushing for us to do the construction work. We’re just telling you that, hey, this is an avenue that we have and sure, we will do the construction work for you, but we know what we’re looking for. We can go into a house, we can check on it for you while your other guys are doing the work, but we can realistically tell you on the front end what it’s going to take time frame wise and money wise.
Brett
0:16:45 – Well, we go back to Emily as an example. You’re not doing the work on that property, but you’re her now her agent But you’re able to go in and advise her of the problems you see and what’s happening in that problem and what the potential issues are Going to be once it’s done and she tries to sell it if she knew that going into it She would have probably renegotiated the deal or walked away because she knew she had an additional maybe 10 or 15 grand and Expenses to get that house ready when I say we have contractors that are also licensed agents on our team, that’s the plus is that they can look at a project and try to determine if it’s a viable deal or if we need to go back and renegotiate. I renegotiate deals every day. We go in and we offer 100,000 on a house and the bid comes in 10 grand more than we thought and we go back and say, well, we’re going to 90, take it or leave it. Nine times out of 10, they got a bird in the hand. Instead of two in the bush, they say, okay, I can’t do 90, but I’ll do 93. Great, that works for me. And we close it, everybody’s happy. But you can’t make that judgment call just on pencil and paper and pictures. You really gotta have a team, evaluate it, look at the property, bid the property, tell you what they’re seeing, and tell you what that’s gonna cost you.
Nick
0:17:54 – Talk about the Suncrest House, for example.
Brett
0:17:56 – Hmm, what a beauty. Oh, you mean with the wine bar? The wine cooler?
Nick
0:18:00 – The wine bar, yeah.
Brett
0:18:01 – Yeah, yeah.
Jeff
0:18:02 – I was just gonna go up there and steal all the flooring out of it that he said was in the house.
Nick
0:18:09 – Everything in that house needs to be thrown away.
Brett
0:18:12 – So yeah, that’s a $39,000 list price. We looked at it. We offered $25,000. The guy obviously is still shopping at $35,000. He has no clue what he’s talking about because we sent Nick over, this one investor I was talking about, the impatient one, Amish, I’m going to go ahead and throw his name out there and let him know, call him out. He’s very impatient. He’s ready to get going. He’s all fired up. He’s excited. Nick went out there and just said, no, this is 45, 50 grand.
Jeff
0:18:37 – Did you look at the only street?
Brett
0:18:38 – And that puts the brakes on it. Yeah, that’s the burnout. That’s the power of the burnout. You and I only looked at for Terry.
Jeff
0:18:43 – Is that not any more doable?
Nick
0:18:44 – It needs to be torn down.
Jeff
0:18:45 – Oh.
Nick
0:18:46 – Yeah, it would cost you more to rehab.
Brett
0:18:47 – Which is why it’s been on the market for 180 days.
Nick
0:18:54 – It would cost you more to rehab basically a full gut burnout and to reframe everything than it would to knock it down and build a new construction.
Brett
0:18:57 – He’s got to know unless he’s never been there. I don’t know. But you know in the long run these things are so important. They don’t teach you this in seminar. They teach you the money side of it and they give you the numbers to make your eyes go wow that’s awesome. But there’s a lot of alligators in this process. If you don’t know what you’re looking for, you could end up like Emily. I hope we can save her from this deal, get her out of it whole, and then move her into a better situation on the next rounds. In this case, she could potentially be looking at getting hit for a loss.
Nick
0:19:30 – Another example is the 32-unit apartment that the New York investor was looking at.
Brett
0:19:35 – It looked great on paper. It looked fantastic.
Nick
0:19:37 – It looked fantastic. Just something didn’t quite smell right about it. And then after an hour of, you know, meeting with the chief code enforcement officer in Shelby County, we figured out all of the skeletons that they had buried in there.
Brett
0:19:57 – They completely rewired new panels, new plumbing, drywall, roofing. No permits pulled. Not a single permit pulled on a 36 unit apartment building.
Nick
0:20:01 – Tiled it. Everything was covered up. Stop work order.
Jeff
0:20:02 – Shut down the medical district you and I looked at that had the pen pits all the way around it?
Brett
0:20:06 – And it was a, it literally is an apartment complex with its own dead end street down the middle. So I visualized this antique buildings with this beautiful courtyard, gated, but Nick goes down there and it basically, they never pulled a single permit. The city shut the job down and won’t let them go continue.
Nick
0:20:23 – Because now that they’ve, you know, made the city mad, the city is going to make them sprinkle the entire complex, which that might add another couple hundred thousand dollars.
Jeff
0:20:32 – Oh, yeah, that’s expensive.
Brett
0:20:35 – So I guess the moral of the story is, call a good team that knows what the hell they’re doing. All right, well, hopefully that answers your questions. If you are looking to rehab properties, please give us a call. Don’t just hire a contractor out of the phone book. Don’t just hire an agent who doesn’t have the experience in this type of business because it’s so easy to lose 10, 20 grand on a property, especially when you’re rehabbing. We’ve seen properties where literally the slab is sinking or literally the floors are just about to cave in because all the joists are rotted out, but they’ve covered them up with new decking and new tile. And in four or five months, you’re going to be ripping out floors and rebuilding and losing money on that property. So give us a call, 901-692-7401, mymemphisinvestmentproperties.com, and be sure to subscribe to our podcast, 5 O’Clock Somewhere Real Estate Podcast. Thanks for listening.