For aspiring real estate investors, rehabbing a house is considered one of the most ambitious projects to take on. However, it’s equally as rewarding. Imagine transforming a cheap and beat-down property into a lucrative real estate to generate rental income or sell for profit. So, how do you do it? We’ll walk you through the ten steps on how to rehab a house, from running the numbers to the finishing touches. Read below to learn more!
Key Takeaways
- Rehabbing a house requires a meticulous, data-driven process used to determine the right property with great potential for profit.
- The process of rehabbing a house requires significant financial resources; investors need to secure loans and plan their budget accordingly.
- Always secure the necessary building permits and meet safety requirements and codes.
1. Find the Right Property to Rehab
One of the most critical parts in the process of rehabbing a house is finding the right property for you to work on. Not all broken-down properties are meant to be renovated. Simply put, some properties are better to rehabilitate, in terms of location, price, structural condition, and the like.
For this step, it is ideal to work with the best property management companies in the area. They can provide you with valuable insights and even locate high-potential properties for you to look at and choose from. They can also connect you with the people who will conduct professional inspections and assessments of the property.
2. Run the Numbers
Rehabbing a house requires significant financial resources – from purchasing the property to have it under your name to buying construction material and paying for labor. So, finding the right property involves going through the numbers to prove its profitability.
Before you shell out anything, you need to know what it is you’re getting into by having a comprehensive projection of the cost of rehabbing a house against its income potential.
3. Create a Rehab Budget
Once you have a better understanding of what it takes to rehab a property, the next step is to establish a clear budget for your project. This should be based on the current condition of the fixer property.
Look into the type of construction and repair needed to ensure that the house is structurally sound. On top of that, check the fundamental systems (HVAC, electrical, plumbing, roof, etc.) and see if they need any major repair or a complete overhaul. Also, take into account design costs and the furniture and appliances you need to complete the project.
It’s important that you work within your budget to avoid spending more, negatively impacting your profits later on. As a general rule of thumb, investors are advised to calculate their Maximum Allowable Offer (MAO) for the purchase price using the 70% Rule. This formula is: (After Repair Value (ARV) 0.70) – Estimated Repair Costs. This ensures enough profit margin after factoring in repair, holding, and selling costs.
4. Financing a House Rehab and Finding Your Exit Strategy
Given that the cost of flipping a house can reach several thousand dollars, it is a fairly common practice for real estate investors to get into rehabbing by loaning most of the upfront costs. Real estate investors in competitive housing markets, like in Austin, have several financing options. This includes hard money loans, private lenders, partnership or joint ventures, and home equity loans.
At the same time, you should also be thinking about your exit strategy. Meaning, determining how you plan to “exit” the project and gain profit. Whether you plan to turn it into a rental income property or sell for profit, your exit strategy can influence your loan’s approval.
5. Pull Permits & Plan Timeline
Before you start any work on the property you plan to rehab, you need to secure all the necessary permits. This will ensure that your real estate investment is compliant with codes and regulations. In Austin, for example, you need to connect with the Austin Development Services Department to apply for the different building permits that you’ll need for your electrical, plumbing, HVAC, and structural work. Know that securing the permits not only prevents fines but also avoids delays in your project timeline.
Speaking of timelines, you need to come up with a realistic timeline for your project. Consider the different phases of the demolition and construction work, and allot enough time to account for possible delays.
6. Demo & Clean-Out
With the right permits in hand, you can start with the demolition or demo job (in construction terms) of the property. When rehabbing a house, in most cases, the property requires a full demo and clean-out of all damaged or outdated parts of the property.
Doing so, instead of trying to salvage damaged parts, will avoid any structural problems later on. On top of that, wiping out the property will provide you with a clean slate to work on, which is a lot easier if you plan to significantly alter its layout. More so, demoing will give you a clear view of hidden issues like mold infestation, water damage, and foundation wear and tear.
7. Structural Repairs & Systems
Once you have demolished and thrown out all the damaged aspects of the property, it’s time to work on building it all back up. Whether you decided to demolish everything (including the walls) or keep parts of it, it’s important to ensure that your building is structurally sound. Then, work on the critical home systems such as the HVAC, electrical, plumbing, drainage, and so on. Make sure that the work is done by licensed professionals and is compliant with all building codes and safety standards.
8. Cosmetic Upgrades
To finally bring your dream property to life, it’s time to focus on the cosmetic improvements that will turn your property into a home. From paint to appliances, furniture, and lighting fixtures, these can dramatically change the final look of your property.
However, it’s important to be mindful of your spending. It’s easy to overdo it. So, align any new purchases with your budget and try to recycle and reuse what you can.
9. Inspections & Punch List
Now, before final staging, the final step in rehabbing a house revolves around securing all the certifications that verify that your property is habitable and meets all building and safety requirements. To do so, your property must pass city inspections and get a certificate of occupancy.
If the inspector finds anything that your property is lacking, you need to include these in your punch list, which is basically your final quality control checklist. This details all the minor repairs, touch-ups, and finishes that need to be done so that the house you’re rehabbing is finally complete. The punch list is often addressed immediately after inspections to rectify any issues found.
10. Final Touches and Staging
With most things set up and the house having passed all necessary inspections, one of the final steps leading to your exit strategy is to add final touches and stage the property for potential buyers or renters. Consider working with a professional property stager and elevate your property’s visuals for face-to-face showings and in photos and videos for marketing purposes. Once you’ve accomplished everything on your punch list, you have successfully rehabbed a house, and it’s now ready for sale or occupancy.
Protect your Investment with Bay Property Management
If done right, rehabbing a house is a lucrative investment opportunity for people looking to turn a broken-down property and give it a new lease on life. However, doing this is not a small feat. So, you’ll need all the help and support that you can get, like getting an Austin property manager. We can help streamline your rehab project, from finding the right partners, securing permits and ensuring compliance. Interested? Contact us today!
