SMARTERLANDLORDING

ADVICE FROM EXPERIENCE

Rehabbibng Properties

How to Fund Your Rehab

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It takes money to make money, right? Yes and no.

So, I’ve proven that seller financing is out there. You can truly buy a home with no money out of pocket. After that, what do you do about repairs? We are way to new to real estate game for our private lender to trust us with any more than we needed. I’m still baffled that we were able to convince her at all!

So, we had to get creative in financing the rehab. Of course, that includes doing a good bit of work yourself. Elbow grease is hard on your back but easy on your pockets!

The first thing we did was went to Home Depot and applied for a consumer credit card. It was inevitable, right? Home Depot allows you to make interest free purchases for 6 months-24 months, depending on the dollar amount of your purchase. The minimum dollar amount is $299 (pre-tax). We decided to lump our purchases together so that we never fell below $299.

If we really only needed a shower rod to complete a unit, we would couple that with the purchase of a gift card, so that we met the $299 threshold. Couple this with a healthy practice of returning unused items and making sizable monthly payments, and it’s not too bad!

Just make sure that you pay off the balance before your 0% financing term expires. If you fail to do so, Home Depot charges you interest retroactively!!

Home Depot also has a project loan which allows you to finance large renovations with extended low-interest financing. Given our rapid growth though, we did not qualify for any more credit than we were already awarded. Waamp waamp.

I should note that Lowe’s has similar financing options. It just happens that Home Depot is incredibly close and convenient. Both retailers employ local contractors as well. So, if you need to finance a project but can’t do the work yourself, this might be an option. Please consider all of your options though; I’ve heard horror stories.

What are some of the creative ways that you have financed your rehab?

Newbie Fails

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Remember how I spoke about feeling like a newbie? 

Well, it didn’t end there. In fact, I’m constantly reminding myself that I’m an amateur. In an effort to encourage those of us who are completely green to real estate investing, I’ve shared a few of my most humbling mistakes below. Hopefully, you will be able to avoid some of these same pitfalls. Please share some of your novice blunders too!

 

  1. I learned pretty early that easy work can be made hard if you don’t have the proper tools. When we started building our RE toolbox, we thought it would be easy and cost effective to buy a Mr. Seven Hands  instead of multiple screwdrivers. Boy, were we wrong. This thing is a mess. It’s easy to keep handy, but it’s hard to use in tight places. It tries to fold when you are using it, which is annoying! To be honest, I’m just plain embarrassed at even owning the thing. Can I still call myself a serious investor?
  2. During our first phase of renovations, we felt like complete idiots when we realized how much trim needed to be painted. Our 1920’s triplex is filled with beautiful crown molding, floor molding and tons of detail. After we got a good dose of the time-consuming nature of any paint job, we stopped and looked at our trim work and almost wept. Newbies just don’t know! Paint Lesson #1
  3. Is it a beautiful rainy day outside? If so, do not paint a room with windows or doors open. Paint will bubble when introduced to moisture and humidity. We spent more time scraping and sanding than we did painting on this one. Paint Lesson #2
  4. If you are like me, you aim to get the job done regardless of the circumstances. I get tunnel vision towards the end of a project. So, it’s no surprise that I stubbornly continued painting the exterior of my house, even though temperatures were dropping. Paint Lesson #3, paint peels when it dries during low temperatures. Scrape, sand, and paint again.
  5. I had the electrician over one day to fix a fan, which had apparently given out. So, I ran to Home Depot and picked up a new one. Being the frugal gal that I am, I bought one of the cheapest ones available. Looking back, I’m surprised that the electrician didn’t laugh and walk off the job. Instead, he politely said, “This is for a bathroom. You’ll need to go back and buy one with a fan blade of at least 52 inches…” Duh.
  6. How many of you can install your own appliances? Well, I’m learning. I had to order an extra-long dryer cord not long ago. I wanted to make sure the length was long enough before installing it to the dryer. So, what did I do? I plugged it in the outlet—ungrounded. It tripped all of the breakers in the house and blew a hole straight through the shirt I was wearing, charring my undershirt. Sheesh! I should have known better. I’m turning red just thinking about it. Electrical Lesson #1
  7. I hate popcorn ceilings. So, here I am in the bathroom spritzing the ceiling with water when all of a sudden the exposed light bulbs explode sending shards of glass everywhere! It nearly scared me off of my step stool. Every idiot knows that cool water and hot glass don’t mix, but sometimes I’m brainless. Electrical Lesson #2
  8. Our most recent building purchase has fuses instead of breakers. This is new for us. So, we are tinkering with the fuse box trying to figure out why some of these Edison fuses don’t fit. Then, it hits us. Part of an old fuse is stuck in there! So, my partner goes to work trying to pry that old fuse out… only to realize that we are buffoons. That particular spot required a small-base fuse, not an Edison. So, we had to call the electrician out to fix the mess we made. Electrical Lesson #3
  9. We went from being renters in June to owning 7 units in January. That means that we have 7 house keys, a cellar door key, a storm door key, and a rent box key. Throw in the fact that we have 2-4 copies of each key, and you can see that we are confused! Can you imagine how embarrassing it is to bring a contractor over and then fumble with key after key? It is one thing to feel like an amateur and it’s something completely different to feel like an amateur in front of a professional.

You can bet that we’ve learned from these blunders and made appropriate adjustments. Please tell me I’m not alone. If you are a know-it-all, expert real estate investor, I encourage you to pull from your past. Enlighten us with your former fumbles. It can be humbling for you—and encouraging to us all.

How Nextdoor.com Can Benefit You

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I’m a millennial. Naturally, I’m registered on at least 6 different social media sites—all for different reasons. Each social media site provides a unique platform. Facebook keeps me connected to family and friends. LinkedIn provides me with professional visibility, and Pinterest keeps track of products that appeal to me.

So, which social media platform is best suited for the real estate investor? Nextdoor.com

Nextdoor is a social media site that connects people within specific neighborhoods. In order to register on Nextdoor, you have to first verify your address to proving your residency in the neighborhood. You must use your real name.

The site allows for neighbors to exchange information about block parties and community clean-ups. Neighbors can buy and sell items between each other, and they can report break-ins and burglaries instantly. Good neighbors make good neighborhoods. I enjoy the camaraderie that this site provides.

While, those are my personal reasons for using Nextdoor, it has benefited me greatly as a new investor as well.

 

Example #1:

I marketed a vacant unit in the area on Nextdoor. Within 24 hours, I had an application submitted based on a neighbor referral. No multiple showings; no craigslist chaos. The applicant is now a wonderful tenant. I would rent to her a million times over.

 

Example #2:

I posted an inquiry about a property, stating that I was a real estate investor. Within minutes, I began receiving messages from other real estate investors in the area. These investors provided me valuable information about the property. Plus, I am now connected to other well established investors who farm in my area. This pool of investors are my competition—as well as potential mentors.

 

Example #3:

I was working in a unit when I discovered that I needed a reciprocating saw. I’m a new investor. I have yet to purchase a ladder, let alone a reciprocating saw. So, I posted on Nextdoor asking if anyone would lend me or rent me their saw. Within 30 minutes, a neighbor was at my doorstep, saw in hand. If that’s not neighborly love, I don’t know what is!

 

Example #4:

Many of my neighbors know of me, even if we haven’t met yet. They know which properties I own, and they appreciate my investment in the area. This neighborhood-wide recognition will undoubtedly add to my credibility as an investor. Recently, the neighborhood association newsletter editor asked me to participate in an interview, which I happily obliged. Companies are told to market their brand. As investors, we have to take advantage of opportunities that allow us to market ourselves!

 

I encourage all new investors to consider unlikely resources, like Nextdoor, when developing your RE portfolio. I also encourage me tenants to register on Nextdoor as well. If my tenants are grounded in the community, surely they won’t want to move. At least, I hope not.

Can I Paint My Apartment?

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We often have tenants ask us if they can paint or do other types of “improvements” to their apartments.  The short answer to that question is no. 

We have experimented in the past with letting tenants do some painting or other improvements and for the most part it has ended badly.  I have found walls painted black, purple and other garish colors, colors that take three coats of primer just to cover up.  What’s more is everyone thinks they are a really good painter.  I am here to tell you they are not.  Paint inevitably ends up on the trim, baseboards, carpet, tile hardwood floors, you know, everywhere!  And the paint job is usually so bad that it has to be redone anyway.

Repainting an apartment is not cheap in the first place.  Having to paint over a terrible paint job or use three times the amount of paint normally required because I have to cover “Deep Purple” is not something I want to spend my hard earned money on.

So no, you cannot paint your apartment.  You are going to have to live with the two colors that I use in every apartment I have, Navajo white and pure white.

“But I will leave you the left over paint so you can touch up and get more if you need it after I leave,” they often say.  Nope!  I have been down that road too.  I do not have time to remember which paint color and which finish goes where. 

My two standard colors make my life easy.  I know exactly what color and what finish is used in every apartment I have.  No longer do I have to search for or remember which color goes with which apartment.  I or my maintenance people can simply pull out any can of Navajo White if a place needs a bit of touch up.  It is simple and easy.

Smarter landlords want more “easy” in their lives.  This business is hard enough. So go to your local paint store and pick out a couple of colors for your apartments.  I would suggest a nice off-white for the walls and stick with white for the trim.  Use them every time.  In the coming years you will be glad you did.

Getting a 203K Loan? Expect Trouble!

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Yeah, I said it. The 203k loan is troublesome.

But now that I’ve gotten that out of the way, you should know that the FHA 203k brought my real estate investing aspirations into reality.

There is a plethora of information out there regarding FHA’s 203k loan. You can see details of the loan here: http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/203k/203kabou.

Basically, the 203k allows you to finance a property as an owner occupant with a 3.5% down payment. So why is this so special? The 203k allows the homeowner to finance repairs into the mortgage too. That means that normal, everyday folks can buy a property that is in substandard condition and rehab it—without having to eat the rehab costs in one sitting.

Oh, did I mention that you could use the 203k loan to purchase a multifamily property? Yup, that’s right. You can buy a 1-4 unit property, live in one of the units, and rent the others out.

That is exactly what we did. We purchased a triplex, and the other two units (now rented) cover the mortgage. This has allowed me to get my feet wet in the world of rehabbing and landlording—and save more money to fund other deals.

Before you get too excited though, you should know that the 203k loan is complex. You won’t quite understand all of the complexities of it until you go through the process yourself. It has many moving parts and quite a few people involved.

For example, you must use a licensed General Contractor for all of the repairs outlined in the loan. Additionally, all of the repairs have to be inspected and approved by a HUD inspector who works on your behalf. At one point, we had the lender, the investors, the contractor, and the inspector all in disagreement over one issue. To say the least, it can be exhausting.

The 203k loan requires a large amount of paperwork. You will need access to a copy machine, fax and scanner. I was able to move things along when requests were made of me or my contractor because I could easily copy, fax and scan. If you do not have these resources, expect to be insanely frustrated. I cannot count how many times additional documentation or signatures were requested.

Couple these hassles with requirements that were not disclosed on the front end (like lead-based paint testing, mortgage payment reserves and payment processes), and you can imagine how frustrating this loan can be. I will (most likely) never do a FHA 203k loan again.

With all of my complaining out of the way though, I don’t regret at all my decision to take advantage of this loan for my first property purchase! I could not have bought my triplex without a means of funding the rehab.

Plus, my other property acquisitions should feel like smooth sailing after that—right?

 

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Tips for DIY Painting

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If you are new to real estate investing, I’m guessing you will be doing some work yourself. That’s great! This has truly been the biggest learning curve of my life. We have been rehabbing our triplex for 5 months now, and I can say with certainty that I’ve found the task that I would like to hire out, as soon as possible—painting.

Painting is the worst.

It is repetitive on your wrist and wearing on your back. You have to tape and lay down drop clothes. You need to designate an outfit for ruin. The worst part is how long it takes! This is especially true if the room requires multiple coats. One room we painted required 5 coats! Remember those custom colors?…

If you’re like me and you can’t quite afford to hire the job out yet, head this advice. I learned the hard way.

  • Buy good paint brushes. Cheap brushes will shed. Better brushes are easier to clean.
  • Buy one of those 14-in-1 paint tools. I’m not sure what all 14 functions are for but I use it a heck-of-a lot.
  • Clean you brush after every use! 
  • Clean your paint rollers after every use. They are reusable. Seriously… I didn’t know this.
  • Buy drop clothes, preferably the cloth kind. Do not use table clothes—despite how free they may be. The paint will leak through.
  • Pick neutral paint colors and stick with it. This will save money and headache in the long run.
  • Take a picture of your paint color, brand and sheen. Keep it on your smart phone until you’ve memorized it! This way, you know you’re buying the exact same paint each time.
  • Buy paint in 5-gallon buckets instead of gallon cans. You’re going to go through more than you think. If you’re using the same paint colors, you know it will be used at some point. It’s cheaper in the long run, and you can use the empty buckets for so many things.
  • Buy the cheap paint. It doesn’t matter how expensive it is, you are going to need at least 2 coats.
  • Don’t leave the door open if it’s raining outside. It will cause paint blisters on your wall.
  • It’s easier to scrape paint from finished floors than sand them from unfinished floors.
  • Do not use painter’s tape on finished hardwood. It will take the top layer of polyurethane right off!

I’m sure this doesn’t cover all of the painting mishaps that I’m doomed to encounter. If you have other bits of advice, please enlighten us all.

Don’t Forget the Oops!

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Rehabbing properties and understanding what a rehab takes is a key part of almost any real estate investment strategy.  Distressed properties that need a lot of rehab are often where deals can be found.  Plus, rehabbing properties after a tenant moves is just a part of the landlording business.

Estimating a rehab job can be tough, especially when you are just starting out.  You want to make sure you estimate accurately so you can budget appropriately.  There is nothing like the felling you get when you are 80% through a job and realize you are out of money.

Newbies are often afraid of larger rehab jobs because they fear that they will miss something, and you know what, they likely will.  They also seriously underestimate the amount of time, labor and materials that will be needed on any job.  Costs overruns can add up quick.  But here is one way both newbies and more experienced landlords can protect themselves.  Factor in an oops into your rehab budget.

The oops budget is designed to make sure you have the money in case you miss something or underestimate.  Depending on the size of the rehab job, I usually will make an oops budget somewhere between 10% and 30% of my rehab estimate.

So for example, if I have a smaller job, consisting of mostly paint and some tile work totaling about $5,000, I will only budget about 10% or $500 for an oops.  I likely did not miss anything and if I did it is not going to break me.

But if I have a serious rehab job, where I might be taking a property down to the studs or doing some foundation work, I might budget as much as 30% for the oops.  I do this because there is simply much more to miss.  I do not know what will be found once we really get in there and tear something up.  An oops budget of $15,000 or more is not unheard of in larger more complicated jobs.

If you do not need the oops money, then you can save it for the next job.  I also sometimes think of extras that need to be done as we go along.  I added closets on one property since I had some money left over.  These closets allowed me to charge a higher rent.   I have done other things such as adding more exterior lighting or improving the landscaping to enhance appearances.

So use the oops, it is a great budget item and real budget saver.  You newbies out there should be cautious and budget for a higher oops.  Trust me you will need it until you get more experience.

They Can’t See Your Vision

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Recently, Jenna wrote a post describing her experiences showing an apartment and getting it in rent ready condition.  She mentioned that she was showing the property before she was finished with all of the repairs and that one person “shared her vision” and signed a lease for the unit.

First, let’s congratulate Jenna on getting a unit rented and then ready.  She deserves it.  This is her first property and I saw it not long after she bought it, so I know the amount of work and time that was put into it.

Now, let’s use this opportunity as a teaching opportunity.

You see, I think it is a waste of time to show the property before it is rent ready because in my experience, most folks cannot or will not see “your vision.”

Yes, Jenna did find someone who saw through the unpainted walls, the missing appliances, the unfinished floors, the wet paint, the drop cloths, the extension cords, the tools lying around everywhere, etc, etc.  So again, let’s give kudos to her.  But I think her experience was the exception rather than the rule and it would have been a better use of her time to focus on getting the unit ready.

Why can’t potential tenants “see your vision?”  I think for several reasons.

  • They have never touched a paint brush much less done a major rehab so they just cannot conceive of “your vision.”  All they see is the mess which screams “RUN AWAY!”
  • They can’t see past the mess.  The mess prevents them from seeing where their TV, bed, sofa, computer, etc. will go.  In their minds, they cannot see this as their “home” because it is not put together.
  • The unfinished nature of the unit will highlight the imperfections rather than the benefits and charm of the property.
  • They do not want to worry about whether or not you will be finished when they are ready to move in.  Will they have time to finish?  Will they run out of money?  They don’t need to worry about that when there is another unit ready to go just down the street.
  • They want to move and be done.  Moving is stressful.  They do not need the landlord coming in to “finish up a few things.”
  • They are afraid you will not do what you say you will do.  They have been burned by other landlords before.  Why go through that again?

Obviously there are exceptions as Jenna has demonstrated.  Some will “see your vision” or will really like the location or some other factor.  But most will not be able to see through the mess.  Why watch them cringe and frown?  Save your time.  Save your energy.  Focus on getting it done, then show.  Your pool of applicants will likely be larger, giving you the added benefit of being choosy.

Real Estate Advice for Rookies

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This past week made me reconsider if I should be blogging about real estate.

Aside from books, blogs, and conversations with investors, I don’t know much about what I’m doing.

I’m great with numbers. I can analyze, budget and prioritize like a pro. Despite my strengths, I have underestimated the time commitment every single time. If you are getting into real estate because you think that it’s easy, please turn back now.

This post is for the rookies.

I set a goal to have the vacant unit rented by November 1. So, I started showing it before it was even ready. I walked prospective tenants through the repairs. One woman bought into my vision and signed a lease. There was no turning back.

We stayed up past midnight all week to make sure that we met our deadline. We bought and installed appliances, hung blinds, built cabinet doors and changed out receptacles. We painted the entire apartment—two coats.

If you had given that list to me 2 weeks ago, I would have said, “no biggie,” with confidence. I had no idea how time consuming it would be. I can’t imagine what it would have been like if I had to do it ALL myself. Luckily, I have an awesome partner and helpful friends.

Truth be told, I’ve received ample advice to add a cushion to cost estimates. I just never knew to do the same thing when estimating time commitments for do-it-yourself repairs. Maybe I’m a too confident for my own good…

If I were to relate this new, hard-learned knowledge, I would recommend that  estimated time commitments be multiplied by three for any first-time endeavor. That multiplier of three should not include the time you spend reading how-to articles and watching you-tube tutorials either.

Don’t feel overwhelmed before you start though. There is a learning curve. I’m confident that I could install a sink and faucet in half the time it took me before. I can vinyl tile a kitchen floor like nobody’s business. And, you should see my putty knife skills. It’s serious.

 

Tools of the Trade – For Real Estate Beginners

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It felt like I was preparing for the first day of school. Do you remember getting excited about shopping for school supplies? I would map out everything I needed, and I would carefully plan out how to best organize them to prepare for a whole new year of challenges.

I re-experienced this excitement after closing on our first house/investment property. The first thing I did was run to the store with a list of tools and supplies that I was sure that I would need. I went home, unpacked them, and organized them perfectly.

I was ready to rehab.

Upon reflection, I could have been smarter. Some of the things I bought were surprisingly useful, like our step stool. I never anticipated using it as much as I do. Other items were just a plain waste of money. So, what tools do you need to begin the path of real estate investing? This post should help.

  • Cordless drill, socket/bit set
  • Wonder bar
  • Crescent wrench
  • Ladder
  • Utility knife
  • Channel locks
  • Putty knife: one wide, one narrow
  • Wire Strippers
  • Electrical tester
  • Dolly
  • Step stool
  • Tool box/bucket
  • Extension cord

Of course, this list is assuming that you have already purchased the bare necessities while you were searching for the perfect property.

There are quite a few other tools that I purchased during my rehab, but I’m not sure how soon every beginner will need them: drain wrench, basin wrench, and dremel tool. When I asked Kevin whether or not this list was exhaustive; he said that his reciprocating saw has been his best investment.

I can say, with complete confidence, that any expensive tools that you can borrow is money well saved. The costs of these items add up quick, and so do your materials.

 

Are you an experienced investor?

If so, which item has been most valuable to you?

Have I left anything off?