I'm writing this post right now as my mind is flooded with ideas for my next renovation that is coming up starting March 1st! That's right, I just closed on my first four-plex yesterday- WAHOOOOOOOO!!!! It's my biggest investment to date and, in that sense, I am a #firsttimebuyer because I have only bought single family units up to this point. So wish me luck! I always appreciate good vibes!
Closing Day on my First 4-plex!
I thought blogging about renovation costs was important because in all likelihood with your first time purchase, you will have to do some updates in order to get your new home or investment property to where it needs to be. Renovation seems to intimidate a lot of people, especially first-time buyers. While it is definitely more work, it also opens up a lot more opportunity both financially as well as housing inventory wise. So don't discount it. It can be a power play for sure. Hopefully I can provide some guidance into the process and what to consider when you are looking at properties that need some work.
So when you are searching for a home and you come across one with potential, feel free to dream. Embrace the vision! That is one of the exciting parts of the journey and don't shortchange yourself with stress or worry. Enjoy the moment.
Later, once you have settled in and decided you want to go ahead and make an offer, then the analysis begins. The first major step is to decide what updates or fixes must happen now versus what you will want to do down the road. But how do you decide that? Well, whenever I am purchasing a place, during due diligence period I start to create a "RED, YELLOW, GREEN" list. I stole this strategy from Felipe Mejia (@filipemejiarei on Instagram). When I get the inspection report back I read through it, look at my notes or ideas from before and I then use all that information to categorize which items I want to do and when.
Photo Credit @Annie Spratt
Here's my breakdown:
Green Category: These are things that must be done for safety, right now, in order to make the place livable. For example, if there is knob and tube electrical work that is a fire hazard, it needs to be fixed now. If there is mold, it needs to be fixed now. If there is a structural issue that compromises the house, it needs to be fixed now. Or it could even be something like an issue with the hot water heater being on it's last leg. To me, a hot shower is essential and that's a must that needs to happen right way. You may decide some of these projects are a no-go after the inspection and walk away. But if you decide to move forward they need be addressed before you move in. So think green for GO (and I guess the color of money that will come out of your pocket, lol).
Yellow Category: These are cheap and easy fixes that I can do myself as I move in and fix up the place. For example, things like painting and switching out lighting fixtures are relatively straightforward and simple to do yourself. Yellow items are things you can live with temporarily, but are weekend projects that you can tackle along the way. These are also upgrades that you can pay for as you go seeing as though they aren't relatively too expensive.
Red Category: These are major capital expenses or updates that I will have to tackle down the line. Red means stop. That means you don't have the money to tackle them now so don't even try. These are wish list items. These are visions that come together to make this place your dream home. You will have to save up for red list items and most may require professional assistance in tackling. Examples of these items may include: adding in a pool, redoing the new kitchen, putting a "she shed" out back. These are items that bring the potential of the property fully to life down the road.
So start by categorizing every project that you want or need to do to the place in these three columns. Here's a handy dandy chart you can use to help you:
Created by @MackofAllTradesNY
Once you have categorized the scope of work, now it is time to develop a plan to take it one phase at a time. The green column becomes phase one, the yellow column becomes phase two and the red column becomes phase three.
You must prioritize the green column and set a budget for it now because this is the list of upgrades that ideally should happen before move into the property.
I like to set a minimum budget and a maximum budget. The reason I do this is it gives me permission to spend money on the renovation at a time where more money has gone out than has come in. After I close on a property, it's usually a scary time for me because I struggle with the scarcity mindset. A large chunk of money going out is intimidating. In addition to that, I am frugal, and sometimes to the point of my detriment. In a situation like a renovation, it's really important to put in quality that will last a while. Instinctually I lean towards wanting to spend less and save money, which can cause me to cut corners if I'm not careful. So knowing this, I force myself to spend at least a set amount that is reasonable for the scope of the work. It's a mind trick I play mentally while I continue to work on shifting my mindset from one of scarcity to abundance.
Photo Credit @ Michael Logmire
With that being said, I also set an absolutely max budget and I let everyone know that it is set in stone (contractors, property managers, tradesmen, etc.). Hell, I put it all into writing too, so there is absolutely no question whatsoever from start to finish. And when costs creep up, I hold myself accountable to not going over and look for solutions to balance out the budget.
The next step is that I reach out and get quotes and shop around. This takes time - lots of time - so I start early. But I am at the stage where I still have more time than money, so I'll invest my time researching in order to get the best value and to feel reassured in the end that I got the best value. Sometimes, if you don't put in the work early, you end up with a bit of buyer's remorse where you are left wondering, could I have gotten that at a better price? That is not a fun place to be. The only way to avoid it is to do ample research up front. Also, please note how I said best "value," not "price." When it comes to contractors, tradesmen and property managers, cheapest is rarely better. In fact, it's usually a surefire way to get a half-assed job. I have learned that the very hard way.
So, how do you shop around?
First Step: Hit up the internet and look at general prices to get a feel for what things are selling for and learn about the systems that you may need replaced. What types of furnaces are there? How much are maintenance costs? How do they work? The more you do the research ahead of time, the more you will be able to get from the conversation when you actually speak to someone who specializes in that. It will also help improve your ability to suss out BS.
Photo Credit @Christin Hume
Step Two: Reach out to your network of people to get their idea of what estimates should be based on their previous experiences and ask for recommendations. Also ask them if they had a bad experience and what that person's name is so you can steer clear of them. Who did they use? How much was it for both parts and labor? Were they happy with the person or the services provided? Anything they would do differently if they had to do it again? The more you ask, the more you will know.
Step Three: Look up those companies and people up that were recommended by your network and read their online reviews. You will be able to find some, some you will not. Many of the old school tradesmen only operate through word of mouth. So if you can't find them on the internet, just do one more search on the Better Business Bureau (BBB) website to make sure there aren't any complaints pending against them. These three steps are crucial in informing you and building up your confidence and knowledge so that when you reach out to a contractor or what not, you have an idea of what they should know and you can do a preliminary judge of their professionalism and knowledge before you meet them in person.
Photo Credit by @ Charles Ly
Step Four: Arrange a day to be at the property and line up appointments for all the contractors or tradesmen to come walk the property and give you written bids for the job. If you haven't yet closed on a place, your buyer's agent should be able to help you arrange this. Ideally, it's better to do it during the due diligence phase because if the work ends up being way more than you ever imagined, you can still get out of the deal with your deposit. While it's also possible to do it after the due diligence period has closed, and then you are officially in contract, note that you would not be able to cancel your contract without losing your deposit if you decide to walk away from the deal.
When the specialist or contractor comes, ask them lots of questions. If they get annoyed and won't answer them, that's a red flag. If they are eager to teach you and explain it thoroughly, that is a good sign and shows they have nothing to hide. Also, see if you get along with them and assess whether or not you feel like they are trustworthy. This is a person that you will have to have critical conversations with along the way, so suss it out now as to whether or not they will be able handle a difficult conversation should something go wrong. If you don't immediately get that they don't take things personally when things get tough, cross them off the list. It doesn't matter how desperate you are to find a contractor or how cheap they are. It is not worth it in the end to work with someone who is untrustworthy. Your intuition knows. And if you don't think you are a good judge of character, be honest with yourself and bring along someone who is. Have someone there with you who will also give you the straight up honest opinion. It could be a friend and/or your real estate agent.
Step Five: Now it is time to narrow down your prospects to the person and written estimate that seems to give you the most value. Value to me is a combination of someone who is trustworthy, experienced, reliable, knowledgable and responsive. I need someone who will pick up the phone when I call. That is most important to me. The price comes after that. I'm not looking for someone who is the cheapest. I also don't want someone who is unreasonably expensive. I'm Goldilocks, looking for someone in the middle.
A true professional is someone who doesn't demand the majority of the money up front or even along the way. They are fair. Yes a small retainer is reasonable, but after that we need to set up draws. I pay for certain things after they are done, and never before. I also make sure to inspect the work that is complete before I cut a check. If they can't agree to that, it's a no-go. I'm also looking for someone who takes notes when we meet and doesn't rely solely on their memory (which can sometimes be faulty), and I'm looking for someone who knows and respects my budget. They need to be someone who takes pride in their work and doesn't do it solely for the money, but also for the satisfaction of doing good work. I respect those people and am more than happy to pay them fairly. Quality is key.
Step 6: Finally, once I have narrowed it down to 1 or 2 people who I'm seriously considering doing the job, I then have the most important task, I verify they are insured and I have them sign a workman's liability waiver form stating they are not my employee and if they get injured on the job, I am not liable. If they don't sign that, it's a hell no. If they don't have insurance, it's a hell no. That is a major concern and a red flag that you should not ignore in our litigious society. A true professional has no issues signing this and providing a copy of his insurance to you. Period.
So now you have completed the hardest part of the reno. Seriously, after you have found the talent, if you have done your due diligence in locating the right person, now the rest becomes easier.
Make sure once you have that estimate and the professional, set aside 15% more as a contingency. I know, I know you're saying: Why? You had me set a budget earlier and if he's a true professional and respects my budget why would I ever go above that? Well, there are things beyond their control. Especially when you fix older homes. Unexpected things crop up. Expect it, prepare for it. A true professional will help look for solutions to try and stay within your budget when these things do arise, but that is not always possible. Accept the fact that you can plan for everything to a T and some unknowns are still sure to arise. If you don't accept it now, you will be blindsided. It's part of the game. It's part of the deal. That's why move-in ready houses cost so much more. That risk has been removed.
So at this point you have a working budget, a strong candidate, an itemized estimate. Now it's time put the plan into writing. Always take the time to put it into writing. You will find yourself coming back to it throughout the project and revising it as things pop up. Also it's nice to have it in writing so there is clear communication between you and whoever is doing the work for you.
Photo Credit @ My-Life-Through-A-Lens
A strong written reno plan includes these components:
Scope of work
Specific materials selected to be used with amounts and price
Delegate as to who is going to complete what
Here are a few key tips when writing up your plan:
Set the goal first and work backwards. Every choice should be made so it aligns to the goal. Your goal should be measurable and time-bound.
For example in my current renovation my goal is:
To upgrade the apartment for 13k or less and rent out to reliable tenants by April 1st for $1,500 plus utilities.
It's specific, but succinct. The details of the renovation are saved for later. However, it is measurable. At the end of the reno I can literally say: yes, I accomplished this, or no, I did not. That is key in order to create accountability for yourself.
Next create the timeline to pace out the scope of work that will happen each day. I break down exactly what items need to be completed each week. If you have more than one person doing the renovation, it's important to think about who needs to do what first and in what order. For example, usually if you are refinishing the floors, that is the last thing that happens in a room. You do electrical first, then patch and paint and then work down to the floors. If you have multiple rooms, which ones need to happen first in order to get others done? Be strategic and map it out.
Start with the end of the timeline and work backwards. Meaning you block in finishing touches on last day, and pace each item from there until you get all the way to demo day, which is the first day the project starts.
The timeline will then serve as a checklist to make sure you keep the project on schedule. Don't skip this step. It's crucial to making sure a project doesn't run over.
Then create a list of all the materials you want used. Make sure to include the price for each one, where to find it and ensure it is in stock. So whether you or your contractor get it, it is clear what you want exactly. Also note contractors get discounts at most hardware stores. Sometimes its better to let them get the supplies as long as you have been crystal clear what you want.
Delegate in writing who is responsible for and does what. Literally write into the plan who is responsible for what. For example, I will be doing a lot of painting on this next project in order to save money. I wrote which rooms I am painting and which rooms the painter will be painting. It has to be in the plan so there is no ambiguity.
Photo Credit @ Yoann Siloine
Hopefully this post not only gives you a clearer idea of what needs to be done for a reno project, but a system of how to tackle it. I wholeheartedly encourage first-time buyers to consider taking on a fixer-upper. It's not as scary as it sounds, and it is one of the best ways I know to end up eventually getting exactly what you want, especially on a limited budget or in a seller's market.
If I forgot anything or if you have any tips to contribute, please make sure to comment below!