Hi All – I’m back after an 8 month hiatus (more on that later). Some of you may remember the porch renovation I was doing with Ipe. I’m in eastern MA. This is a long post, with really only a couple of basic questions: did I get gaffed on the plumbing costs, and does $50 per square foot seem like a reasonable cost for a gut/rehab?
Background: I’m approaching retirement in a couple years from my ‘real’ (unrelated) job, and plan to go full time into the ‘landlord’ business – buying, renovating, and managing rental property. I have 4 buildings now – 2 single family homes that I just bought, and two 2 family homes that have been fully occupied since I bought them. In all but one case, I bought properties that can be rented at break-even or better, with minimal work required, but have tremendous upside potential for when I have the time to invest in them.
I broke from my model (more on that later too) a couple months ago to buy a house that was only valuable for the land it sits on – I got an inside track on the sale, and basically paid less than the land was worth. It had a 680 sq foot single story house on it, which was in nearly tear-down condition. The idea was to buy and hold, then tear it down and build a 2 family in a couple years. I then got the brilliant (?) idea to improve the house to make it habitable, and try to rent it to mitigate my costs during the ‘hold’ period.
So … I started the project on 11/19 – exactly a month ago – working part time – and have had one hell of a learning curve. I am my own GC, grunt laborer, and carpenter. I’m nearly done, and will bring it in under $50 per square foot (complete gut / rehab). Here’s a breakdown:
Plumbing -100% replacement of everything – new full bath, kitchen, laundry area. Subbed out, cost approx $9,000, including all fixtures. Keep in mind that all the work was done in a really nasty crawlspace area.
Electric – 100% replacement of everything, including moving the meter & panel. Subbed out, cost approx $7,000, including all fixtures.
Framing – gutted back to the studs (myself) – existing framing was grossly under-framed – no headers over openings, some areas had studs on 4′ centers (I think the sheathing was holding it up!). Total cost for all framing lumber, etc – $750 – plus my labor (about 120 hours so far for everything) to bring it all up to code.
Windows – vinyl replacement, $1700 for 12 windows. Got the installation time down to less than 30 minuts per window at the end.
Insulation – subbed out, goes in Monday – $1800 for fiberglass in walls (including interior walls), R30 in ceiling, and R19 in crawlspace ceiling, plus plastic on the ground. May go back later and put in stem walls so I can insulate the block walls, but I really hate going down there!
Walls – Wallboard / skim coat plaster – $3100, goes in Wednesday. Works out to about $1.15 per square foot, which I think is a steal, and is from a reputable guy.
HVAC – Paid a guy $500 to relocate a couple vents (gas hot air system is in good shape), fix the furnace filter bracket, and install a vent for the gas dryer – all in the crawlspace.
Floors – Discovered decent fir floors under the adhesive tiles – got a guy to repair a few boards and re-finish the floors, including removing the adhesive, for $850. I’m not expecting them to be spectacular, but they should look pretty decent, and I much prefer this to carpeting.
Add about $1000 for trash removal (so far), a thousand for trim, doors and misc, and a couple thousand for kitchen appliances (the kitchen cabinets are coming from my own house – DW wants a new kitchen, and came up with this idea as a motivator to get me to do it!)
Bottom line – about $32,000, which, when added to the purchase price (& ignoring my labor) will bring the total financial picture reasonably close to my model / target: monthly rent times 180 = total purchase price (including renovations). If I can hit that, I can break even or better on cash flow and run the business at a profit.
My original schedule was to be done by year-end, but since I haven’t got a tenant for January, I’m relaxing the schedule so I can enjoy the holidays.
Observations and lessons learned, so far:
I would never, ever want to be a GC – I’ll do this for myself, but couldn’t imagine what it would be like to have a ‘customer’ standing over my shoulder. I can make quick cost/benefit trade-offs, schedule adjustments, etc., without consulting anyone.
The cost of ‘consumables’ is surprisingly high – little things like nails, caulk, etc. really add up.
The super-glue band-aid trick really works – my finger tips are shredded. I think that one was from Brian (DP).
Convincing subs that I am not an amateur is essential to getting good prices. Creating the illusion that I know what I’m doing is vital! That and a clean job site, and paying on time.
One of these days I’ll post my whole rental property business plan and tell you about the 6 months I spent as a wedding planner!
Bill.
Replies
Bill,
Good story...........there's been alot of rental talk here in the bus. folder past couple of weeks. Jump on in.
Eric
I Love A Hand That Meets My Own,
With A Hold That Causes Some Sensation.
Nothing seems out of line to me. Where I live, for new supply lines and drains in the heinous conditions you describe, figure approx. $1000 per fixture for the rough-in and fixture installation, then add the cost of the fixtures. The $50 per square foot sounds fine to, especially given the small house. Congratulations on not being a slumlord.
I enjoyed the story also. I think the rent time 180 model is whacked. I ran through 4 of mine and don't have a one that is over 48. Just my opinion and of course location can make a difference.
No way to tell whether the prices are good unless we worked in your area. Some things are less here and some are more. The electric compared to my area was about right, plumbing a couple of grand high, you would be lucky to get an insulator on a renovtion in my area.
If I were going to tear it down in a few years I probably wouldn't have gone to the length you did for rehab. Like the framing for instance, if it stood this long why screw with it for a few more years.
One great thing about the rental business is that if you have too much in something you can just hold it a little longer and it will usually work out. Not true with other investments. You must have really humped to keep that type of time frame though. DanT
Wow... you're living in the land of incredibly cheap houses. In the example I gave in the other thread (~260K house, $1200 rent), the equation is rent times 220. You're saying that you get the same house for about $58,000. Even if I somehow cleverly get the house at 70% of market value, as the 'experts' suggest, it's still rent times 154.
Why aren't folks in your town just buying the places??
Well, like in most cases they don't know how, want to know how, or want to bother with rehabbing them. A lot of folks do buy houses but as much as you hear it the fact is there is a certain segment of our society that simply doesn't want the responsibility.
And again I work hard at buying right. After I posted that I went back and looked at the other properties and the worst I came up with was 61 month payback. It is a good area no doubt and I don't doubt that there are areas that are more difficult to find/purchase property.
But I still believe that in 90% of the areas it is simply education, study and want to in order to find good deals. The figures you are quoting are the ones that you originally used when you quoted the realtor figures. As I said realtors don't typically have the deals you want. DanT
Guys - Thanks for the feedback! I was pretty comfortable with all my costs but the plumbing (I just have no calibration point) and it sounds like I'm in the ballpark on that.
I'm actually surprised the insulation and plaster were as low as they are - in both cases, these guys walked in and 'measured' by counting stud bays - I almost wanted to hand them a tape measure so they could see that nothing is on 16 or 24 inch centers (or even the mystical black diamond centers!) - it all seems random. At least the stuff I replaced is on 16, and the strapping is on 12 in centers (probably overkill, but the rafters were on 24).
David - I appreciate the comments about not being a slumlord - I take a lot of pride in my properties, and as a result I think I get excellent tenants (I do credit checks and only consider renters with great credit). All of my properties are walking distance to a commuter rail station, so the demand is strong. Funny story: in one of them, my wife walked in when I first got it and said "the linoleum is curled at the edges in the kitchen - you have to replace that before anyone moves in - you can't expect people to live like that" .... and in a moment of incredible stupidity, I said "but dear, the linoleum in OUR kitchen ...." I stopped right there, but it was too late, the damage was done - now I'm replacing ours (next month).
Dan - If your ratio is 48, you are kicking #### - that's amazing. The real estate market is incredibly hot here, so I have to walk away from a lot of properties that don't meet my 180 criteria. Even at that, everything I've got so far is an inside deal of some sort - one was a sealed bid auction that few people knew about, the others directly from owners without a realtor. There's not enough margin in my calculations to include realtors' fees, nor is there enough margin for me to pay anyone to do the routine maintenance. So far, I've handled everything myself (including lawn mowing!), except that I had to pay a plumber to snake a drain on the day before my daughter's wedding (although I did go over there and try it myself first!). I've observed that there aren't many real critical problems in the business (knock on wood) but when they come, they are always at the worst possible time.
I should also mention that somewhere along the way, my plan to eventually tear this down has changed - the renovation is of high enough quality (I think) that this could eventually be a wing of a much larger house - the lot, and the neighborhood, would support adding 2000 sq ft plus a 2 car garage to the 700 existing to make either a great single family home or a two family. The nice thing is that I'll be able to ignore it for a couple years (until I'm doing this full time) and have nearly neutral cash flow.
I spent the morning in the dreaded crawlspace - dragged the nailgun and some 2x8s down there and sistered a couple of punky joists (I noticed a lot of bounce in one corner of the bedroom floor). I'm now going to kick back and watch Sunday football for the first time in weeks, and hope tonight's snow storm doesn't keep my insulation contractor out tomorrow morning.
Firebird - I'll try to summarize my financial model for the rental property and append it to one of the existing threads. I try to look at cash flow, P&L, and ROI as conservatively as possible. It may not work everywhere, but here, it all boils down to my very simple 180 ratio. I also have a tax angle that works for me but may not work for everyone. Stay tuned
Bill.
Let's see, the 1500 sf 3bdrm house up the street (which was a rental, not sure if it will be again) sold for $360K. At 48x, you would need to charge... $4800/month. I don't think that's going to work. If you bought it outright your mortgage payment would be barely half that!
A single family that sold for $360K would have to rent for 360,000/180= $2,000 / month to work using my model. Of course, your mileage may vary, depending on the interest rate you can get and local property tax rates. And keep in mind that 180 is my upper bound - I try to get properties with a lower ratio.
Bill.
Bill W.....dont append...just start a new thread. I'm very interested in your rental business plan.
blueWarning! Be cautious when taking any framing advice from me. Although I have a lifetime of framing experience, all of it is considered bottom of the barrel by Gabe. I am not to be counted amongst the worst of the worst. If you want real framing information...don't listen to me..just ask Gabe!
Blue - I just put it out there ... the thread is in the Business section - Rental Property Financial Analysis .. Bill.