Rehab Rookie to Pro: Property Investing Smarts – Dive into the real estate discussion where Jeff and Nick unravel the mysteries of property rehab. From tales of overpriced acquisitions to the strategic finesse of market-ready transformations, this discussion is a goldmine for investors. Discover the delicate balance between initial costs and potential returns, and learn why expertise and honesty in rehab estimates matter. Whether it’s navigating inspections, understanding repair costs, or leveraging expert advice for lucrative flips, this episode offers invaluable insights for anyone looking to maximize their investment in the bustling world of real estate investment.
Jeff
0:00:54 – Well, one of my problems is, and I’m trying to learn this whole process, I’m touring properties for investors. Brett went to one with me. It’s ridiculously overpriced at $75,000. I may be able to sell it for $115,000. So you know you write a contract contingent upon inspection. Before I write a contract contingent on inspection I just kind of want to know what I’m getting into. Brett goes out there says oh yes $40,000 rehab. So $75,000 and now you’re upside down so this house is only worth $30,000. Maybe I should just ride with you when you go to look at some of your properties and kind of get an idea of what these things cost of rehab so I can kind of get an idea of what I need to pursue.
Nick
0:02:11 – Yeah, I’ve done enough of these to have a general idea of what a rehab is going to cost. And I’ve actually been told this by multiple investors that I’m too expensive. Well, this one particular house that the CMA is based off of, I always factor in a buffer room. You know, if I think it’s gonna cost $20,000, I’m gonna tell the investor, you know, hey, 25 grand, we’ll get everything you need done. Because when we run into a few little items throughout there, I don’t wanna have to come back and nickel and dime the investor. I would rather, just like on that property, we did about an extra $2,500 worth of work that I didn’t have to go back to Terry and get approval for, we just did it because I knew I had some buffer room. And then at the end I said, here’s all the extra things that we ran into that we had to take care of, but your bid is still going to be your bid because I had some wiggle room built in there. So that, from my standpoint, is actually hard to explain to an investor of why I’m probably more expensive than a lot of the bids that you’re going to get.
Jeff
0:02:58 – Well, what you just told me, let’s say I’m an investor, what you just told me was you charged me five more thousand dollars than you should have, but you did $2,500 worth of free work. You see what I’m saying? I mean, I don’t know if that’s worth mentioning to the particular client or not, but I’m like you.I want a guy that knows what he’s doing, that’s gonna give me a firm price, and once you give me a price, I’m gonna hold you to that price.
Brett
0:03:07 – Well, there’s the key, Jeff.
Jeff
0:03:08 – I’ll switch it back to the other side. I don’t care if you come up with $5,000 worth of other work. Sorry, you gave me a price of $25,000. It’s not going up to $30,000 now. Now, if you think you need to buffer that in, that’s good, but don’t mention that to me.
Nick
0:03:36 – Right. And see, that’s what most of the investors feel that way, so that’s why I always try to give them a worst-case scenario on the front end, and then we can work backwards from there. Because there’s been numerous projects where I’ve told the investor, hey, we came in under budget on this one, so I originally told you it was going to cost $20,000. You owe me $17,500, and I’m the type of person that doesn’t mind doing that. Now, that probably also takes a little bit for people to get comfortable with me to know that I’m going to treat them that way, but I’m not getting rich off of one of these rent models.
Jeff
0:03:49 – Oh, I know.
Jerry
0:03:50 – When you’re doing rehab work, you always have to have a contingency because you just don’t know what’s going to happen.
Sponsorship
0:03:58 – 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 and ask for Chris or April.
Nick
0:04:20 – Well we just started another one in Frayserr, and Brett, you’ll remember this one, Rolling Hills. I had to cut my bid $5,000 to allow him to lock up the house. So I said, hey, I can’t just cut my bid $5,000 because these are tight anyway, but what I’ll do is I’ll find somewhere throughout the scope of the project to cut the scope back and still make it work. So one thing that we did, all of the walls that were intact, when you put a flashlight on them and you could really see all the imperfections and issues in the drywall, well, we had initially planned on, you know, skim coating and slicking out all of those walls. Well, because I had to cut my bid back, we decided, hey, what we’re going to do is go in there and do an orange peel texture. It’s going to look great at the end, but it’s going to cover up a lot of those imperfections and it’s going to save a week worth of work. So that was one area that we were able to value engineer. But on the same token, we had anticipated this house had central heat, but no air conditioner. They had window units. Well, we decided we’re going to put in a central condenser, and the furnace was currently working, but it’s a 16-year-old furnace. Well, for an extra $800, we could go ahead and change out the new furnace and have a completely new system, which is going to be better for the investor when he goes to sell the property because all the mechanicals are brand new. So we made the decision-
Jeff
0:05:38 – You’re telling me the furnace was $800?
Nick
0:05:40 – Well, adding that to the rest of the package with everything else, yeah, to change that furnace up. The ductwork and all that. Yep. Added $800 to change out that furnace.
Jeff
0:05:48 – But the actual box, the furnace itself, was only $800.
Nick
0:05:52 – $800. The rest of that was in A-Coil, which we were going to have to do anyway, adding a condenser. The condenser, the ductwork, the line sets, all of that.
Jeff
0:06:04 – Why is the air conditioner, what are you calling the air conditioner outside?
Nick
0:06:05 – The condenser.
Jeff
0:06:07 – Why are they, they seem like they’re $5,000, $6,000, $7,000, $8,000. Why are they so much more expensive?
Nick
0:06:09 – This was a three-ton system that we’re putting in, so with a furnace, the A-Coil, condenser, line set, and the whip. And all new grills and a new thermostat in the house was right at $6,200 for a three-ton system.
Jeff
0:06:22 – Oh wow. So I can get heat and air, brand new heat and air, and my average rehab for $6,200.
Nick
0:06:23 – Yeah, I mean that’s a good ballpark. Now granted, I’ve been doing this long enough to know that there’s different subcontractors you use. The guy that I’m using for this house is very capable, warranties his work, and is able to pull permits when needed through Shelby County, but he specializes in investor properties. That’s his wheelhouse. He goes in, he’ll change out two systems a day, and he rolls on to the next one. This is not the same type of crew or the same subcontractors that I would use on a million dollar house in Germantown. So that’s where a lot of your cost difference is. You have to find electricians, plumbers, different tradesmen that really specialize, that want to work in some of these areas that we work in.
Brett
0:07:05 – There’s also a volume aspect to it. I mean, most of our investors that are doing turnkey flips that we’re representing, they’re doing it in volume. I had a conversation with Tom and his partner and it’s like, man, you made two grand on one house, 20 grand on another house, and 15 grand on another house. Average it out, you did well on this three house package. Don’t look at one house and say, well, I only made two grand if you’re doing it in volume. Same thing with the work. If you can do 10 homes, you’re gonna be able to get an HVAC system contract installation for a lot less than what you could if you did a onesie twosies.
Nick
0:07:34 – Absolutely.
Jeff
0:07:35 – So any Hispanic labor, paint, sheetrock, trim?
Nick
0:07:54 – Most of the labor nowadays is Hispanic, but on these investor-type projects, the rent readies, we’re using what I would call a jack-of-all-trades crew and master of none. These are guys that, you know, it’s five or six guy crew that can go in, they can do tile work, they can do paint, they can do gimmo, they can do floor.
Jeff
0:07:57 – So you’re not hiring a painter for $1.25 a foot or a sheetrock guy or $10 a sheet?
Nick
0:07:59 – No, because that just takes entirely too much time for one of these turnkey projects and it’s entirely too expensive. You know, a lot of these investors are going and hiring a two or three man Hispanic crew and saying, oh, you know, they can do it $4,000 less than I can. Well, but they’re also not licensed. A lot of them don’t have their own insurance, which, you know, being a contractor in Tennessee, you have to carry workman’s comp insurance. You have to be bonded. I mean, there’s a lot of other things that go into it. Oh, it’s horrible.
Nick
0:08:22 – I knows all about the workman’s comp and general liability insurance.
Brett
0:08:24 – We had a new investor that Nick’s working with now who called us from the podcast. I think she listed the podcast.
Nick
0:08:31 – She called you from Lawrence.
Jeff
0:08:32 – Lawrence, gotcha. Lawrence found me from a podcast. So yeah, it’s still a roundabout way. In that situation, she contacts, she had one or two houses under rehab currently?
Nick
0:08:43 – She had one under rehab and one was completed that was listed with another agent.
Brett
0:08:48 – Right. And now she’s saying, God, I wish I’d have found you guys before I did all this, because we’ve been able to guide her through the reality of what the properties are worth through valid CMA data, right? Also a good perspective on what really needs to be done to pass FHA, to pass MHA. One of those homes is probably going to cost her a considerable amount more because they did things that weren’t the code. So while it is great and good for you to find yourself a top-notch real estate agent, top-notch investment agent, that actually knows what the hell they’re doing, it’s also good that if it’s gonna require work, your team that you’re working with understands and knows what has to go in this house to make it work. Because I hear all the time that people say, well, it should have only cost me 30, but because of this, because of that, it was 42 and 45. And now you’re upside down, your ROI is 24 months away before breaking even on your rate of return, and it turned out to not be a good investment. I believe that just comes down to being honest with people about the truth. I think you’ve been honest with her, Nick, and I think that’s built some loyalty with her and some trust that if we can get her out of this one with her shirt on, that she’ll be very successful.
Nick
0:09:54 – I had a nice long conversation with her yesterday and went and looked at a house in Cooper-Young and I ran a CMA for her and said, hey, this is the one that has a huge potential, big upside, but this is not your average market rent ready that you’ve been doing. This is where you really step it up, show your game. I mean, this is 200 yards from the heart of Cooper Young, like walking distance to all the bars.
Brett
0:10:17 – Did she get an offering on it?
Nick
0:10:35 – She thinks that she’s going to have it locked up by the end of the day today. But that’s one that it’s a huge project, more so than she’s undertaken yet. She said she was a little nervous about it, but said, hey, pick my brain. I’ll help you out. I’ll guide you because this is one that I’m excited about for her because she’s got potential to do really well with it.
Brett
0:10:50 – Yeah, absolutely, and it’s going to be a good flip for her. Midtown, you just can’t go wrong. I don’t care. Even if you do it and have to hold it for a couple of years, Midtown Memphis is probably one of the hottest markets in the city. Yeah, but that’s good. I remember you telling me about that.
Nick
0:10:50 – Well, you know, kind of going back to the CMAs like we were discussing earlier, when I pulled some CMAs, there were some with the same neighborhood code. But when you go back and look at pictures and how, wow, this is a new construction that’s three years old versus, you know, this 110 year old house that’s been completely remodeled, which is what she’s going after. So you have to throw those out the window because they’re just not good comps.
Brett
0:11:10 – A lot of investors get burned because they just don’t get good data. And I’ve got some investors that try to do their own data, but I mean quite frankly, if you can’t get into the CMA and look at actual sales, it’s hard. You’re taking averages from Zillow. You know, Jeff and I talk about this all the time, and Nick and I and Jerry and I have talked about this many times. Zillow is not a CMA website. You cannot determine value by looking at Zillow. If Zillow says it’s worth $80,000, whoop-de-doo, go get a beer and celebrate because it’s not gonna be worth 80,000. I’m not knocking Zillow or Realtor calm I mean they’re doing what they’ve been asked to do that is give you a broad 30,000 foot overview That’s all it is the only thing on Zillow that I have over the last five years that I’ve Determined is spot-on is their rents estimate if they say that house rents for $1,200 a month You put your rent range at 1150 to 1250 and I guarantee you every time my investor is going to get rent in that range, that’s one thing they’re good at. But as far as the valuation, not so much. So CMAs are important. With our client you’re talking about, my point was this is a perfect example of getting a solid agent that knows what they’re talking about, having a solid contractor that actually understands what they’re looking at and what the course is going to be to get you to your ultimate goal. Because now, in this situation, there’s been some things that she’s sent to us that she’s kind of walked away from because you were honest with her and said, look, here’s what you’re looking at. Here’s some problems I see. And that’s something that the other guys were not telling her because they’re looking to do what? Turn in the house and get a check.
Nick
0:12:43 – You know, I explained that to her yesterday, too. You know, hey, we’re not after one transaction. You know, we want to build a relationship so that you come to us with all of yours. And just like you said earlier, we want you to tell all your friends when they want to come to Memphis and invest, hey call us.
Brett
0:12:53 – Glenn and I’s motto, Glenn’s motto which I adapted was pretty simple. You make one investor happy and it just snowballs. I mean you get you get referrals, you get purchases after purchases and then more referrals and eventually you get to the point where you just get up and write offers right. It’s hard work at the beginning but it’s it pays off in the long run. Very few agents survive in this business because they just don’t put in the time and effort to build it as a business. They look at it as a part-time income source and they don’t do a good job of it. So anyway, we would love to hear from you. 901-692-7401. MyMemphisInvestmentProperties.com. You can go to that as our website. We are also working on a properties page, hopefully, because we’ll have that up sometime soon, where we’ll have all of our properties listed. It’s been up two weeks? Thanks for telling me. All right, we do have a new page up on our website.
Nick
0:13:46 – Way to pay attention.
Brett
0:14:06 – Man, my life has been hell the last two weeks. I’ve been just ridiculously, stupidly busy. Good busy. So yeah, we have a page up which has some of our properties on it that we have listed, some off-market stuff. We’ve got details about rents and pictures and rehab versus new construction. So check that out. And also don’t forget, subscribe to our podcast, Say, hey, I’d love to hear you guys’ opinion on this. And we’d love to get experts in here, people that can relay that information to us. I think we’re going to work on getting somebody in and talk about tax benefits for investment properties, hopefully sometime in a podcast soon. 5 O’Clock Somewhere Real Estate Podcast. Be our subscribers. You’ll get the latest updates every time we release an episode. And feel free to go to our website, send us a message. If you have a topic that you’re interested in hearing, send us an email. Let us know.