Investment Property Number 3: A Lesson in Rehabs, Time Management, and Budgets

How We Acquired Property Number 3 and its Condition

A realtor friend of my employer pitched this house, which had been damaged by a fire, as a potential fix and flip.  Although my boss passed, he told me about it.  The property had an attic fire that burned through the roof dormer and through the floor joists over the 2nd story bathroom.  Thanks to the fire department’s quick response the fire did little structural damage, however, there was a lot of water damage.  The entire north side of the house was soaked from attic to basement.

It Looked Like a B Horror Movie Set

I took Mrs. College Rentals with me to look at the house.  It was like we were entering a spooky old house from a B horror movie set.  The smell of smoke was thick and all the walls and stuff left behind was covered in soot.  It was October and colder and the inside of the house was damp.  The fire occurred 6 weeks prior and there had been no utilities working since then.  No attempt was made to clean up the water or damage.  The carpet on the first floor below the fire had started to mold.  This was going to be work, but was it a good deal?

Seeking Wise Council

We made several trips through that house after our first visit.  We took Mrs. College Rental’s father through it and got his opinion.  (He helped us buy house number 2) and has done several remodels.  We also got an electrician, plumber, and carpenter to go in and take a look.  Keep in mind I built and remodeled houses for several years and I work as a project estimator at a lumber yard, but I had not done carpentry work at this level for about 15 years.  I wanted as many good opinions as I could get.

Making a Plan

After talking to professionals in various trades I went back to that house again.  This time I made a list of repairs that would need to be made and took some measurements.  To make a long story short we decided to gut the entire house down to the studs, repair the fire damage, install all new electrical and plumbing throughout, and make a few changes to the layout.  I made a material list and we got bids for the plumbing, HVAC, electrical and a roofer.

After Crunching some Numbers

Mrs. College Rentals began to run the numbers on all the data collected.  She developed our financial plan for this property and discussed getting a construction loan with our bank.  We decided to go for it. We were able to pay cash for the house and borrow the money to make the repairs.

The Long Road

It was December when we started.  The weather was cold and there was no electricity which meant no lights or furnace.  I would work (after work) evenings and weekends until it was too dark to see what I was doing. In December I couldn’t work long at all on weeknights before it got too dark. I ended up using a generator to supply light and run my saws.  I was able to complete a lot of the demolition and repair work myself.  We were also blessed to hire a very good part time employee who knew a lot about carpentry.  We found a lot of unexpected termite damage that we had to repair and many other minor issues.  But it all came together in the end.

  • We gutted all the plaster
  • New electrical and plumbing throughout the entire house
  • Added a second A/C and furnace for second floor
  • Restored original kitchen cabinets and added new counter top
  • Installed all new appliances
  • Remodeled 1st floor half bath to a full bath
  • Enclosed an old porch into a pantry
  • Sheetrocked and painted
  • Refinished the hardwood floors
  • Repaired termite damage to walls and hardwood floors

We had to work hard to complete this house on time.  There were a lot of nights working until mid-night or even 2 am.  Keep reading below and I’ll explain why I had to work so late. It’s a good story.  In the end we have a house that’s like new on the inside.  We still have work to do on the outside.

The Pros!

The house is located within walking distance of the local university and the college bar area.  The home has a new roof, electrical, plumbing, sheetrock, and we added a second HVAC unit for the second story.   We also added a second full bath. The house is like new on the inside. This commercially zoned property can legally house 4 non-related renters. Perfect for students!

The Cons!

We still have plenty of work to do to the outside of the house.  The construction dumpsters rutted up the yard and it will need to be landscaped.  The house will need new siding before long and some exterior trim painted.  There is only one parking spot on the property and so the tenants have to use off street parking, however street parking seems to be readily available.

Planning (Perhaps Too Far) Ahead

Here is my favorite part of the story.  This is why I had to work until the wee hours of the morning.  As I stated earlier, I started demo work in December. In February – while I was still tearing out the lath and plaster – Mrs. College Rental listed the house for rent – available in the fall!  A couple of weeks later Mrs. College Rental had collected a signed lease and deposit.  Our new renters had never even seen the house on the inside!  Mrs. College Rental used a rough drawing I made on a piece of graph paper to talk about the house.  She got the house leased sight unseen.  Talk about motivation for me to get it done.  Now I had people who would move into it in the fall.

To DIY or Not? That is the Question

Repairs went down to the last minute.  We were making great time and then suddenly were not.  The sheet rockers were scheduled and I was a little behind getting my nailers in place.  A good friend from my college days came and helped me on Saturday and Sunday so it would be ready for the sheet rockers to work on Monday.  Then the sheet rockers failed to show up for 2 weeks.  In the end, with some different help, we hung the rock by ourselves.  We hired a different sheet rocker crew to come in and mud it.  We went from being on schedule to way behind.  This was late summer.  Falling behind with the sheetrock also forced me to hire out the painting, which I had planned to do myself.  We also paid someone to redo some hardwood floors.

Time for School to Start

The students’ lease began August 1—a Monday. I worked until about 2 am every night the week.  I also managed to be at my day job the next day by 8am except Friday, which I took off.  My employer from my carpentry days came and helped me one evening.

It was Friday morning and we were down to the last weekend. The house was still tagged as non-habitable.  The inspector provided me with a punch list earlier in the week.  Everything that needed completed to get the tags removed was itemized on the list.  Late Friday afternoon (like 4:30) the house passed the inspections.  They removed the yellow condemned tags.  Now the girls could move in and some of the pressure was off.  But I still had not finished installing the trim work and the painters were still painting! We had one last weekend of feverish trimming and cleaning.  On Monday the college kids moved into a nearly new and completed house.

In the End

The only big thing inside the house we did not get done was the hardwood floors on the main floor.  The house had hardwood floors throughout.  We had someone refinish the upstairs floors during the initial remodel. We paid a hefty fee for that, but we didn’t have a choice because I simply didn’t have the time to do it myself. I refinished the downstairs floors myself over the following summer while the renters were out of town.

Lessons Learned

If we would have had just one of the below problems, we would have been fine. But the combination was problematic.

Deadlines

Deadlines are good… if they are realistic. Mrs. College Rental and her deadline about killed me. She was right though. We needed to have tenants for the fall semester. Otherwise our house would be vacant or rented at a deeply discounted price for several months. But I still swore I’d never do another rehab project unless I could just take my time.

Budget

Budget for the project… then ask the bank for extra money. It’s better to have it and not need it than need it and not have it. Mrs. College Rental regrets not asking for more money. The bank even offered to loan us more! But this was our first rehab, and she thought having the lower loan amount would make us more frugal and not go overboard. But when we had setbacks and had to hire out things I’d meant to do myself, we had to pay out of pocket because we’d already maxed out our loan. We would have preferred to use that money as part of a down payment on a new property.

Cash Return on Rental Property Number 3

Four college students rent this 4 bed/2 bath house for $1200 monthly.  After expenses we cash flow $592 a month!  The home also has a full unfinished basement and attic space.  The yard is super tiny, but there’s a nice, big front porch.