Jays Money-maker Foo-Foo Fix-Up Strategy: What to Fix and What to Leave Alone
Don’t Fix Things That Don’t Pay You Back
In order to be a successful fix-up investor (that means making money at it), you must fix only things that need fixing. Ask yourself, “Does it really need doing?” I believe most improvements should be justified on the basis of paying for themselves. I expect the payments to come from higher rents or bigger profits as my reward for doing the work. Your goal should be to get the largest return for each fix-up dollar you spend.
It’s important to separate your “pet ideas” from proven moneymaking fix-up work! I’m not talking about repairs here; obviously, things that don’t work must be fixed. I’m talking about things like moving walls around, adding rooms, making windows bigger, and ripping out and installing new kitchen cabinets. Remodelers do these things, but it’s not cost-effective to do them in the fix-up business. The important thing to remember is that almost everything fix-up investors do should add cash value to the property, either for buyers or renters. Larger rooms and newer cabinets will seldom matter much when it comes to getting higher prices from your customer.
Remodelers Spend Too Much Money Fixing
Many fix-up investors haven’t quite figured out the difference among three activities—renovating, fixing, and remodeling. Perhaps renovating and fixing are similar, like distant cousins; however, investors who remodel fixer-type properties can easily end up working their tails off for very little profits and sometimes even big losses. The problem is, remodelers change too many things that don’t need to be changed. For some reason, remod-elers have a fierce passion to make things better, from their personal point of view, with almost total disregard for what it costs. That’s like saying, “I might as well spend my whole paycheck tonight and get it over with, so I don’t have to worry about spending it later on.”
Most Buyers and Renters Lack Vision
You must understand that most buyers and renters want clean, attractive houses and apartments to buy and/or live in. Most people aren’t even remotely interested in hearing about what the property might be or could be in the future. They are concerned only with what it is right now. If you can grasp this concept, then my fix-up strategy will make perfect sense to you as we go along.
What You See Counts for Everything
When I was a small boy, my mother always told me that looks are not what really counts. “Beauty is only skin-deep,” she would say. “It’s what’s on the inside that really counts.” She was talking about people, of course. However, in the house-fixing business, that advice doesn’t apply and will keep you broke forever. People will never ask to see the inside if the outside is ugly. Instead, the skin-deep fixing strategy works extremely well for house fixers. The fact is, attractive exterior paint is one of the top moneymakers when it comes to making big profits in the fix-up business.
It’s easy to see why I always begin my fix-up projects in the front yard. I’ve seen professional appraisers value identical houses at as much as a $10,000 difference because of plain old filth and junk at one property. In other words, a clean house can be worth $10,000 more simply because the owner hauls away the trash and keeps the house looking nice. Think about that for a minute. That’s a lot of money for ordinary clean-up skills. Suppose it takes a whole week (40 hours) to haul away garbage and clean up a property. That’s $250 an hour—nearly as much as a brain surgeon earns on a day off.
Good looks are the key to making sales or renting properties to tenants. Houses and apartments are judged, like books, by their cover. Looks also have a great deal to do with who your customers will be. There’s an old saying in the rental business, “The property attracts the tenant—ugly houses will always attract ugly tenants.” When you purchase as many rundown houses as I have, you’ll discover this old saying is at least 95% true. That’s why house fixers, like myself, will generally end up replacing most current tenants during the time when they’re fixing up the property. Tenants I inherit when acquiring property are most likely not the kind I want to keep when I’m finished with the job.
My Two-Part Fix-Up Strategy
My fix-up strategy is designed to achieve two main objectives—both are equally important. The first is easier to understand, because it’s what I call the “practical fix-up”—this is what must be done to rundown houses in order to make them habitable and, for the most part, it’s just plain com-monsense fix-up. Almost every investor, experienced or not, will concede that you must fix things that are broken, worn out, or missing—these are the basic necessities; they are not optional. Things like cracked windows, broken faucets, torn linoleum, holes in walls, leaky roofs, interior painting, running toilets, busted doorknobs, junk, and missing fixtures are, obviously, problems that everyone should understand must be fixed. Unfortunately, this part of fixing, while necessary, is not the part that attracts the big profits.
The second part of my fix-up strategy is to fix up the looks, which is just as important as fixing a toilet or the roof. The reason is simple—people rent and buy houses based, to a large extent, on how the property looks.
It’s important to understand that potential customers make renting and buying decisions in a matter of seconds while driving by your property in their cars. It’s that first look and their first impression that counts the most. If your property doesn’t generate positive vibrations on that first drive-by, the new carpets and countertops inside don’t count for anything.
What You See Is the Foo-Foo
Folks who attend my fixer camps and visit my rental houses are always fascinated by my foo-foo beautification techniques. “Foo-foo” is the term I use for cosmetic, gingerbread fix-up. The term originated under the big-top in the golden days of the circus. Paint and makeup worn by the clowns was known as “foo-foo.” Webster’s Dictionary defines “cosmetic” as “correcting defects, making for beauty.” In some cases, my techniques might stretch Webster’s definition a bit far, but most folks agree—my “foo-foo” techniques really do make ugly houses more pleasing to look at.
Let’s be realistic here: if you decide to own and operate older houses, you will obviously need to compete with landlords who own bright and shiny new homes. You might be thinking to yourself, how in heaven’s name can a fixer house operator be expected to compete with newer property owners? I’ll tell you how—you must accentuate the positive.
Older houses and apartments may lack many of the up-to-date, pushbutton amenities found in newer properties, but there are more than enough positive values found in the oldies—things that many newer properties lack. Heading the list is what I often call “old-fashioned charm.” Charm is worth big bucks to creative landlords and it can be developed inexpensively by skillful application of my foo-foo techniques. Charm is present, both inside and out; but outside is always the place to begin the fix-up task.
The Foo-Foo Cover-Up Strategy Exposed
Many older houses have ugly siding that detracts from their street appearance. One economical technique for more pleasing looks is to install new exterior wood siding panels (4 x 8 foot sheets) directly over the top of the existing siding. The new wood panels have a stylish design; once they’re painted and new cedar wood trim is put around doors and windows, the house will take on an exciting new appearance. No need to do this treatment on all four sides. The street view is what’s important here. You can patch up and paint the other three sides if possible.
I once fixed a small, cottage-type house that was listing badly to the “port side.” (For my landlubber disciples, that means leaning to the left.) After many years, several of the foundation piers had actually sunk into the ground a bit, causing the house to tilt. I didn’t have much money invested, but when the foundation contractor told me his fix-up bid was $6,000, I decided on an alternate plan—you guessed it—the siding technique.
I left the house leaning, but installed new siding panels in front, straight up and down (plumb) over the old exterior. Today the house appears nice and straight when you view it from the street. You realize it’s crooked only if you spill a bag of marbles on the living-room floor and watch them race toward the sunken left wall. I might point out that not one tenant in this house has ever asked for a rent reduction because of living in a crooked house. My total fix-up cost to solve the looks problem was under $500.
Foo-Foo Means as Many Frills as They Can Pay For
A difficult lesson for many investors to learn is that it’s not wise to provide too much house for the money. You’ll soon go broke if you keep doing this. Let me explain what I mean. Many tenants can afford to pay $450 a month for rent, but that’s their limit. It’s my policy to give my tenants everything they can pay for with as many frills as I can. In other words, when I rent out my $450 houses, I want them to be the very best $450 houses available. Obviously, however, they won’t be as good as my $600 houses—and they shouldn’t be.
Sizzle Fix-Up Offers the Biggest Profits
When I talk about fixing for dollars, I’m primarily referring to what I call “sizzle” items—things like white picket fences, fresh paint, window coverings, ceiling fans, wallpaper, new counter tops (Formica), attractive floor coverings, planters, shower curtains, decorative porches or entrance doors, trees and shrubs, green lawns, new faucets, modern toilets, and new shower enclosures.
The reasons I call these “sizzle” items is because they are attractive as well as useful. Sizzle items seldom have anything to do with code problems. For example, an old dingy carpet will pass a code inspection just the same as bright new carpets, and trees and shrubs or curtains or ceiling fans have nothing to do with codes or safety, but these items have a lot of customer appeal. Plus these fix-up jobs will pay for themselves very quickly.
Cleanup and Paint Change Looks and Image Quickly
General cleanup and fresh new paint are among the highest-ranking outdoor improvements because they can quickly and inexpensively change the looks and image of a property. They’re also the most important jobs in terms of what new owner-investors should plan on doing first. The reason is quite simple. Most people associate value with looks. Therefore, an unattractive scumbag property always looks worthless.
For older houses with less than perfect exteriors, a light base color— such as off-white or beige—is recommended. Use a darker contrasting color for the wood trim, fascia boards, window surround, and porches. On stucco houses, use the base color and a darker trim color for the woodwork. Painting is a very effective foo-foo technique, because it covers up so many imperfections found in older properties. In terms of payback, a new paint job can add approximately 20% more value to a medium-price house and sometimes double the price of a cheap one.
Foo-foo creates the right look and adds the extra sizzle to help older, inexpensive houses compete with comparable-size, newer properties. When you consider that I generally pay about half the price that would be paid for newer, glossier houses, then rent them for approximately the same monthly rates as the new houses, you get some pretty good proof that my foo-foo techniques are working.
Lawns, Shade Trees, and Picket Fences Are Hot
Many older houses and smaller apartment buildings are just oozing with charm and homeyness. The problem is, you must educate yourself to spot these things while searching through many dumps. Identifying potential beauty in the rough can quickly move you ahead of the competition. Most buyers are frightened off by dirt and deadbeats.
Be especially tuned in when it comes to yards. Everyone loves a yard— and a nice yard can be especially appealing to potential renters. The combination of nice green lawns, shade trees, and a freshly painted white picket fence will keep your properties rented while others are left vacant.
Fix-up investors should always begin outside improvements before ever setting foot inside. The idea is to turn the property around (make it look better) as quickly as possible. Remember: people will judge the looks—and people make decisions outside, not inside. The very first thing I always do is trim trees and shrubs, cut the weeds (which I call grass), turn on the sprinklers, and revive dead yards. You should be watering at the same time you’re fixing the houses. The goal here is to have an attractive yard to offer by the time the house is fixed up and ready to market (whether to rent or to sell).
Window Coverings Are Top Sizzle Items
Curtains, drapes, mini-blinds, and decorative shades will make any house or apartment look homier. Homeyness translates to about 10% more rent when you dress up your houses with window coverings. Also, attractive window coverings will make an empty house rent much faster than one with bare windows. These are good, sound economic reasons for installing them in all your rentals.
Anyone can hang curtains, right? Wrong! If you don’t believe me, chances are you haven’t watched tenants install them. One of my tenants installed curtain rods with nails so long they went all the way through the wall and came out the other side. I’ve seen four-foot drapes hanging on eight-foot windows, curtains that were at least a foot too short, and traverse rods that won’t open. Take my advice here: do this job yourself, while the house is empty, before your tenants show up.
If you use drapes and traverse rods—which I like to use for most larger front-room windows—be sure you purchase them from a supplier who specializes in selling to apartment owners. You’ll find their prices are much lower and it’s easy, one-stop shopping, because they can supply drapes, rods and all the hardware to complete the job.
Houses with All the Right Things Wrong
Some folks say, “The real secret to making big money in the fix-up business is purchasing rundown properties with all the right things wrong.” Indeed, there’s a lot of truth to that; but seldom have I found exactly the
kind of conditions I’d like to have. The truth is that the houses I find most profitable will generally require almost total reconditioning. Notice I didn’t say “remodeling.” The following is a list of fix-ups and repairs I find most common for properties I acquire.
Paint exterior. This includes siding or stucco repairs and anything else that looks bad. Exterior painting can make a tremendous difference in the looks of any property. I recommend medium-quality exterior latex paint. A two-color combination is very attractive. Use a light color for the main body of the house, with a darker trim color for doors, window surroundings, and the fascia or eave boards. With off-white or tan, almost any trim color goes well. Make this change and all outside improvements first and quickly so tenants, passersby, and potential customers get used to the new look.
Fix yards or landscaping. Front yards. The front street view is most important. Reseed lawn areas, plant inexpensive shrubs and trees for improved looks. (Pyracanthas are one of the best shrubs for front yards, because they grow fast, they’re inexpensive, they’re colorful, and they have thorns—which keep kids from pulling them up.) Repair, if possible, or rebuild existing fences. Back yards. Cut and water grass—and that’s it.
Paint interior of houses. Do this after tenants move out, not while the unit is occupied. Use off-white semi-gloss latex paint.
Replace carpets and linoleum, only if required. If they can be salvaged and will look good afterward, repair and clean existing floor coverings. Do this after current tenants have moved out and before new ones move in.
Fix any plumbing that’s not working properly—water valves, faucets, toilet assemblies (guts), shut-off valves, showers, tubs, and sinks. It is usually best to replace them if they are old and ugly or in poor condition.
Replace unattractive light fixtures with new, but inexpensive ones. All switches must work easily; otherwise, replace them.
Repair obvious problems like holes in walls, busted doors, malfunctioning door hardware, broken windows, etc. Exterior doors must have working lock sets—preferably with deadbolts. Rekey, as necessary, making sure to have a single key that works in all exterior doors; this way you won’t have to make so many copies or carry so many keys on your key ring.
Replace old, ugly kitchen and bathroom countertops, if needed, with new ready-to-use plastic tops (Formica).
Cover the windows. Most houses should have full window treatments—plastic mini-blinds or drapes in living rooms, bedrooms, dining, or family rooms and inexpensive, colorful curtains in the kitchen and bathrooms. Always add shower curtains to make bathrooms look complete. Window coverings add that touch of class—and they hide minor flaws and imperfections found in older houses and apartments. If your money is running low, do the street side windows only. Let tenants dress up the back windows that no one can see from the street.
Make sure that heating units and coolers or air conditioners work properly. It should go without saying, but I’ll say it anyway. In my town the temperature gets over 100 degrees in the summer. I use evaporative coolers (swamp coolers) in most of the lower-priced, economy houses and forced air heating with cooling in upper-scale houses. I furnish kitchen ranges—either good reconditioned or economy-priced new ones. I don’t usually furnish refrigerators in lower-income rental properties, unless it’s an upstairs apartment where it’s difficult to move appliances in and out.
Repair or replace wooden window frames. If they’re rotten and they can’t be fixed, replace them. However, most can be repaired and re-puttied without much cost or labor. A little paint will fix most anything on a house that looks ugly.
Add frills judiciously. Frills are OK, if they’re inexpensive. One of my favorites is ceiling fans. One or two ceiling fans add a lot of class to older houses and it’s usually money well spent, because it attracts the attention of potential renters, who associate fans with higher-class rentals.
13.Make big-ticket repairs in stages. It may sometimes be justified to repair bad roofs, especially if they look ugly from the street, but you can do it in several stages. For example, on pitched roof houses, it seldom happens that both sides leak at once; generally the south side, or weather side
leaks first and the other side doesn’t. In the first phase of your fix-up project, patch or repair only the half that leaks. The street side of roofs that are old, weathered, and ugly may not leak yet; however, ugly roofing equates to lower value because it distracts a great deal from the property looks. Replacing the street side is often justified for this reason. Do the back side later. Remember, however, that you can’t get higher rents for new roofs. The function of a roof is simply to keep the water out—and that’s it.
Install shutters. Extra sizzle items that cost very few fix-up dollars are exterior shutters on front street-side windows. You can get inexpensive plastic shutters for windows of various sizes in white, brown, and black from most do-it-yourself stores.
Put up a fence. I always recommend building a three-foot-high, white picket fence around front yard areas. White picket fences show off the property, to renters and potential buyers alike. They keep kids and dogs inside the property; thus, mothers like fences—and mothers make the decision to rent or buy. Need I say more? However, if money is tight, do front fences first, and save backyard fences until later.
Tend the lawn. Always carry a hose and sprinkler with you at all times; then, when you arrive at the job, you can set up your sprinkler and water dry areas of the front yard. Toss out some lawn seed anywhere you see bare ground. Lawn seed and weeds grow together to become a durable lawn when they’re watered enough. The idea is to make all front yards green.
Save most inside fix-up work in multi-unit properties until the units become vacant. (This will happen when you raise rents.) As soon as the outside painting is done and the yards start looking nice, you should begin to raise the rents. The tenants will begin moving out, one by one, and you can replace them with tenants willing to pay more rent for a better-looking property. I call this process “tenant cycling.” Multi-unit fix-up jobs will normally take a year to 18 months when you do them this way.
18.Fix up other structures. Old dilapidated garages, carports, and storage sheds can be made to look attractive by installing new, lightweight-metal, tilt-up garage doors and wood or Masonite exterior paneling. However, do this only on the front or whatever side shows. Old-style, heavy wooden garage doors, with those hard-to-adjust springs and bent hardware, should be replaced. The goal here is to fix up the building enough to have a nice exterior appearance. Tenants like garages—not for their cars, mind you, but because they love to store junk. Most renters are willing to pay $35-$40 more per month to have a garage. As a landlord, this is appealing for two reasons. First, it’s more income, of course. Second, if they have a garage, you can usually convince tenants to keep their stuff hidden inside; otherwise, junk will end up all over the yard instead.
The big difference between successful fixers and the others who will crash and burn, financially speaking, is learning where and how to end a fixer project. Fixing older houses can cost you all the money you have today, plus every dime you might earn in the future. However, it doesn’t have to be that way. Remember: it’s not much fun fixing up junky houses and dealing with deadbeat tenants if you aren’t getting paid well.
Be creative and work within the limits of your budget. It can be done, believe me. One of the best examples I can think of is the highway builders: they construct six-lane freeways, when every motorist can plainly see that 10 or 12 lanes are needed. They build what they have the funds to build—and that’s it. When more money becomes available later, they’ll add more lanes. That’s exactly the same strategy house fixers must adopt to be profitable.
The Fix-Up Revolution—Made to Fit and Ready to Use
Newcomers might be slightly ahead of me on this stuff, but most old-timers will agree with me. Fixing houses today is a whole different ball game in terms of ready-made, easy-to-use materials and instructions on how to do things. Giant stores are in fierce competition for the do-it-yourself trade. They stock acres of every building product imaginable for doing home improvements or for fixing anything that’s broken. The whole idea is to get the new generation hooked on doing things for themselves.
Don’t read me wrong here: not every job is for do-it-yourself investors. As a general rule, I’d be very careful with jobs that concern safety—like gas piping and electrical upgrades. These jobs normally require building permits and, because of the added liability, you may wish to hire licensed contractors to do the work. It’s quite easy to learn exactly what you need to know about installing ready-made fixtures and doing minor repairs. Most salespeople in the do-it-yourself stores can show how your project should be done and explain what piece goes where if you get stuck or end up with parts left over. There are also several good illustrated books—like the Time Life series—that will show you every detail about any wiring job you may decide to undertake. Bob, a friend of mine who is very close to being a total klutz, recently rewired two add-on rooms in his house with just a little help from the clerk who sold him materials. Very knowledgeable, the clerk explained exactly how to install new wires and even drew a simple sketch showing my friend how to connect all the circuits together. The fact that Bob didn’t burn down his house or electrocute himself sold me on the proposition that today’s do-it-yourself movement has come a long way since the time I did my own plumbing work.
Hook ’Em Up and Glue ’Em Together
It seems like only yesterday that do-it-yourself owners had to learn some basic soldering skills if they intended to do their own plumbing chores. Today, unless you’re messing around with copper supply lines, basic plumbing parts are all made from plastic. You simply cut them with a hacksaw and glue them together. All that maze of twisted pipes under the kitchen and bathroom sinks—it’s all plastic now. And, the whole works comes in a packaged kit, with how-to pictures on the back. Drain lines are glued together and those hard-to-bend chrome supply lines under the sink can now be substituted. Flexible polyethylene lines of various lengths, with screw-on fittings at both ends, are the amateur plumber’s dream come true.
Countertops—No Problem!
Not so long ago, installing plastic laminated countertops (Formica) could be a major undertaking. Plywood or pressboard panels and thin plastic sheeting had to be glued together, then held snugly in place with special wood clamps until it dried. Gobs of glue or air bubbles could make the job look like a third-grade ashtray project.
Today, you can buy countertops already made. They even come with 45-degree angle cuts so you can install professional looking corners. All you have to do is cut a hole for the sink and glue the counter top to the base cabinets and you’ve taken a giant step toward modernizing any ugly kitchen or bathroom.
Doors and Windows Just Plop In
With ready-made, pre-hung doors, all you need to do is install them in the wall and trim out both sides with standard molding. Most doors are already factory drilled for lock sets (doorknobs).
Steel pre-hung exterior doors are my favorite, because they don’t crack, split, or swell up in wet weather like most wood doors. And, there’s no drilling: all you do is nail the door and frame into place, install a key set and a deadbolt, and trim around the edges inside and out—and you’ve got a professional-looking door.
Windows are the same. Aluminum sliders, both single-glazed and double-insulated, are ready-made to fit the openings occupied by the old ones. Replacement windows come in every shape and size you’ll ever need.
Easy-to-Install Electrical Fixtures
Modern electrical fixtures of all kinds are easy to install. Fans, blowers, and a large variety of light fixtures take up whole departments in the giant do-it-yourself stores. There’s no longer any need to tear the walls apart when you add extra circuits. Decorative conduits can be installed to conceal the wiring along the baseboard without cutting into walls. Surface-mount boxes are available in various sizes for hooking up new fixtures. Do you remember the old rigid conduits that used to require an electrician with a pipe-bender? Forget that! Now there’s flexible, aluminum conduit that goes around corners and anywhere else you wish to run new wiring. They even make it plastic-covered and weather-proof for outside uses. Electrical wires are not soldered and taped anymore. They’re attached with plastic, threaded, screw-on connectors. As long as you remember to turn off the power at the main meter panel, you can tackle most of your basic electrical jobs.
But remember to turn off the main breaker switch or pull out the fuses before you start any electrical job. If you stick your fingers in a hot splice box and you hear a sizzling sound, stop immediately, pull your fingers back out and reread this paragraph.
You Won’t Get High on Paint Fumes Today
Not so long ago, painting was a stinky job. Oil-base paint, in a small room or other closed area, brought tears to your eyes. Cleaning up the mess with solvents or thinner took almost as long as painting and it smelled worse. Water-base latex paint put an end to these problems. Plus, you don’t need to keep cans of thinner around, because plain tap water cleans up the mess. Painting is a major part of fixing up rundown properties and, fortunately, just about anyone can paint without much training or practice. Easy-to-use rollers, extension poles, and airless sprayers can help you look like a pro with a couple of simple lessons. Also—most physical therapists would agree—painting is one of the most complete body fitness exercises one can do. Almost all major muscle groups get an excellent workout when you paint. You might keep this in mind before you renew your membership at the local gym.
Cabinet-Makers Are Gone with the Blacksmith
Fixing kitchen cabinets with damaged drawers and missing parts was once an expensive fix-up chore that required specialized skills. Today, you can purchase most any size cabinets you need, already built and ready to install in kitchens or bathrooms. They’re available with finished surfaces or you can finish them yourself. The best part is that almost anyone can install them with a few instructions.
Tub kits and one-piece shower enclosures, made from fiberglass and plastic sheets (skins), are available for any size bathroom. They are very easy to install if you simply follow the instructions that come in the box. I use plastic shower kits (plastic sheets) in my older houses where only a tub exists and I always convert tubs to a tub-shower combination. The only tools you need for installation are a tape measure, a straightedge marker, and a pair of scissors. The waterproof plastic sheets overlap one another and are easily glued to any wall surface. By replacing the tub faucet with a shower diverter faucet and installing a short riser (chrome pipe mounted up the wall) and a showerhead, you can have an inexpensive but efficient tub-shower combo.
Fixer Clinics
If you’re interested in learning how to install floors, hang doors and windows, or do simple plumbing and wiring, then I’d recommend you attend clinics conducted free by big do-it-yourself stores.
The stores are after your business and nearly all are sponsoring evening or weekend clinics to show you how to use their materials. Taking advantage of one of these clinics, I recently learned some new tricks about finding and repairing leaks on my flat-roof houses. Naturally, in the process, I purchased several rolls of fiber tape and a couple buckets of high-priced goop to fix my problems. You simply can’t learn enough about fixing leaks on flat-roof houses—short of just saying “No.” to the next seller who offers you one.
How to Estimate What the Job Will Cost
Fix-up work has two parts that cost money. First and most expensive is the labor—on average labor costs 70¢ of each fix-up dollar; supplies and materials cost the remaining 30¢. Certainly, these numbers can vary slightly for some jobs, such as installing or overlaying exterior walls with new siding panels: the materials (4 x 8-foot sheets) are expensive and the labor involved is relatively quick and simple. However, a 70%-30% split is well within the ballpark for estimating most fix-up chores.
If you are able to purchase a fixer property for 30% under the estimated, fixed-up market value—for example, say a $70,000 market-value house for $49,000—and you estimate it will cost $10,000 to fix it up to its full market value, it will cost you somewhere around $3,000 for material and supplies. That means if you do all the labor yourself, you can expect to have an $18,000 equity in the property when the job is done. Doing fix-up (“adding value,” as it’s called) means you don’t need to play the inflation game to make profits in this business.
My rule of thumb is to plan on spending 10% of the amount I pay for the property for fix-up. For example, if I purchase a house for $75,000, I’ll plan on $7,500 worth of fix-up. It can, however, be as much 20% for the “real uglies.”
Knowing What to Fix
Since almost everything that’s a problem can be patched up, repaired, or replaced by skilled persons, it becomes necessary to further qualify fix-up work in terms of economics—“How much will it cost?” This information will help you decide how much work is too much and when it’s best to simply pass over the deal and move along to the next one. The fix-up investor must be concerned with fixing for profits—not just fixing. This is a very important concept, one you must never forget. The two worst mistakes for beginning fix-up investors are over-fixing and fixing the wrong things.
In order to determine what to fix, you must first answer two simple financial questions.
What will it cost to complete the items you propose to fix or repair?
What will the fix-up value be after you complete the work?
Knowledge of cost and value is critical whether you intend to keep the property for rental income or to sell it quickly for turnaround profits.
Recovering Fix-Up Costs
When you spend fix-up dollars to upgrade a rental property, you should obviously get your money back in the form of higher rents. My goal is to recover most fix-up costs from increased rents over a period of one to three years. It takes longer to recover costs for items of more permanent value than for short-life repair items. For example, I often replace old, deteriorated wooden garage doors with new, lightweight metal doors. Although the lightweight metal doors will cost several hundred dollars installed, they add much to the looks and have a tendency to increase the overall property value. However, they require a longer recovery period in terms of payback from increased rental income. Perhaps a better way of explaining this would be to say that I’m satisfied to recover a certain portion of the total garage door costs from increased rents and the balance from extra profits on the permanent value when I sell or trade the property.
Remember: this example applies only to garage doors and similar replacements or repairs that have longer-term values. It does not apply to short-life repairs like painting and adding curtains. Dual-glaze window replacements are in the same category as metal garage doors. It takes much longer to get fix-up or replacement money back, but energy-efficient windows add much to the long-term value of any rental property.
Better Windows Means Lower Utilities and Higher Rents
There is another very important economic benefit that comes from installing modern insulated windows that helps shorten the long-term cost recovery period. The windows cut the cost of utility bills (heat and cooling), which creates an opportunity for owners to obtain higher rents immediately.
Here’s how it works. Even though tenants are paying their own utilities through individual meters, most tenants try to budget a specific amount monthly for housing expenses. Tenants are concerned about their total monthly housing costs, not just the individual costs of rent, utilities, and upkeep. Thus, new insulated windows can provide the opportunity for higher net rent profits. Let’s say you own two identical apartments, and the rent for each is $300 per month. The only difference between the two apartments is that one has old wooden, single-hung, single-glazed windows, with loads of charm—and lots of air leaks; the other has new, energy-efficient, double-glazed windows, without the charm—but no air leaks. Let’s assume the winter heating bills in the apartment with leaky windows average $100 a month and the bills for the unit with energy-efficient windows average only $50 per month. You can charge a higher rent for the apartment with new windows.
New Windows Benefit Everyone
Let’s say you are an apartment tenant who is accustomed to paying total housing expenses of $425 per month—$300 for rent, $100 for utilities, and $25 for upkeep. If you had an opportunity to reduce your expenses by $25 every month, would you do it? I’ll assume the answer is “Yes” because all my tenants would. Also, would you be concerned over who gets what part of your total monthly housing budget, as long as you are saving $25 every month? Again, I’m sure I know your answer. Why should you care? After all, you’re saving $25. Most tenants will agree to a $25 reduction with no questions asked. I think everyone is happy to save $25. The following chart shows the breakdown of expenses before and after installing new, airtight windows.
Fixer-Upper Part 11
Tags: Fixer-Uppers, real estate, real estate book
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