10 Tips for First-Time House Flippers
Even though I'm still walking around with a winter hat, apparently it's spring here in Chicago. My friendly, negotiating sub-contractors from the winter have become the overwhelmed, hardball version of themselves:
Ally: "So, is that a yes?"
Sub-Contractor: *grunt, shrug*
Ally: "Great, see you next week!"
The joy of construction season! In addition to the projects already started, other investment projects will be starting soon. The Wolcott Project is next in line and architectural drawings are in the works. My client is pretty handy so he is going to do the 2nd floor rental unit himself and I will come in to convert the lower 2 units into a duplex.
My client started demo last weekend so I stopped by to check in and found him as expected - exhausted, determined, and covered in plaster dust. I high-fived a fellow sailor who came to help and proceeded to give worldly advice without tripping on debris (unsuccessful). Later that day, another client buying investment property asked me similar questions. So, to all you savvy investors about to jump into renovation, here's what you need to know before you get started:
1. Renovate to your market, not your taste. This is probably the most difficult challenge for new investors. You have to remove yourself from "this is my home," and transition to "this is one of my buildings." You probably have a certain aesthetic that you would want if buying your home, while it might be nice, it's not always economical. Especially with rental buildings, be careful not to spend more money than needed. Rely on your broker to advise you on what buyers in the market are expecting for the price point you need.
2. Use a general contractor. I realize this is a selfish piece of advice. Unless you have some professional residential construction background (not commercial, it's not the same), this project will likely be a huge source of stress. Will the general contractor (GC) charge a premium? Yes. Will it ultimately cost you more? Maybe, maybe not. Here's the deal: Good GC's have sub-contractors that work with them all the time so they're getting better prices than you would otherwise because the subs know what to expect. You will most likely also run into hidden issues in your building, half the battle is figuring out what needs to be done.
Do you know what this means?
(FYI, my client does actually know what this means and has residential construction background)
Your GC will know what needs to be done. Without a GC, you may run around with multiple subs without getting a definitive answer on next steps. If you're pulling permits, the shedding of liability on the GC can pay for itself in spades.
3. You need plans. I know all the rehab shows have GCs showing up and giving numbers on the spot by just looking around. Unless you are doing cosmetic work (e.g. replacing cabinets, flooring, existing fixtures, and paint), GCs will need a drawing. Even then, designing on the fly could cost you money in "ah-ha!" moments and rework. If you're not doing structural work (layout changes), you may be able to get away with an interior designer. Otherwise, you need an architect. If you're doing a gut rehab, you definitely need an architect to stamp the drawings and pull permits. I highly recommend you pay the extra money to have the architect self-certify the drawings - it saves weeks of time with the City and gives you more flexibility. Even if a GC gives you a bid without drawings, you should expect change orders and additional fees later because your GC is ultimately giving a reasonable guess.
4. Time is money. Scheduling your construction can make or break you. There are things that need to be done and there are things that need to be done first. Demo needs to be cleaned before framing starts, framing needs to be done before MEP starts, MEP needs to meet while framing is being done, Mechanical needs to start before plumbing, electrical needs to start after Mechanical and Plumbing, Low Voltage needs to start after Electrical starts and before they finish. Doing things out of order can cost you weeks and months. Also, back to item 2, subs love to get paid and they will come in and do work upon request regardless of whether or not you're ready. They won't redo it for free because your scheduling was wrong.
5. Demo is sneaky. Demo can go on forever if you're not on it like white on rice. You need a lot of people in there - preferably 4 swinging and 2 hauling. Figure demo will cost you about $6 per square foot. Demo is also not just about taking it down, it's about cleaning it up. You need a clean slate for safety reasons and so you can walk through and visualize your layout before framing starts.
6. Dumpsters are stressful. It's no secret how much I hate dumpsters. You have to put posters up to clear the street from cars because the Alderman's office and the City just point fingers at each other. You need to start this days ahead of time and start blocking the spaces. Your dumpster will also have a time limit (e.g. replaced a minimum of every 7 days) so if your crews are not efficient (say, during demo), you could pay for a lot of extra dumpsters.
7. Round costs are not actual costs. Round costs are the following: Selling Price - (Purchase Price+Holding Costs+Renovation Costs+Closing Costs). Actual costs are the following: Selling Price - (Purchase Price+Holding Costs+Renovation Costs+Closing Costs+Selling Costs+Interest Payments). These are minor differences that can add up to quite a bit of money. For example, if you're taking out financing for the building, you're likely paying more interest than principal in the beginning of the loan so when you pay off the loan at closing, it hasn't really been paid down by the mortgage payments. Also, your broker is working on percentages so if you sell for higher, you're paying more. Think about that when deciding your resale value.
8. Be nice. No matter what, take the high road under duress. Having a confrontation with anyone whether it be a contractor, inspector, neighbor, appraiser, or trespasser is not in your best interest. Actions speak louder than words and make sure you're 150% correct before taking action - fire them, question their authorities, call the police. The most random people can make your project a nightmare and ultimately cost you money. You're most likely sealing your fate by not being nice.
9. Finish carpentry is king. Finish carpentry includes all the fun stuff - drywall, fixtures, cabinets, flooring, trim, doors, and paint. Finish carpentry separates the good from the great. Don't skimp on these costs and get references. Buyers care about the guts of the house, they care even more about how it looks.
10. Keep the goal in mind. Know your finish line and keep moving towards it. Construction can be stressful and if you lose sight of what your ultimate goal is, you may miss the forest through the trees and have a terrible time in the process. Have fun with it - construction is one of the most tangible and rewarding experiences out there.