Should you buy a rehab for your next rental property? 

Automation and software are helping landlords like you become more efficient. And these efficiencies open up opportunities to scale your business. If you’re looking to expand your portfolio and buy more rental properties, you could consider a home in need of rehab. 

Why buy a property in need of major repairs? 

Because the more repairs a home needs, the cheaper the asking price and the more value you can add. Not only can you immediately increase the equity in the property just by giving it new life, but you can also expect to get competitive rental rates. 

Competition for sourcing and buying value-add properties is different from buying an existing home on the MLS or through a real estate agent. 

Value-add rehabs are not move-in ready and certainly not ready to show to the average home buyer looking for their first or forever family home. Sellers are often in distress, whether financially or functionally. Meaning they may be in foreclosure, going through divorce, or own a home that is in such bad shape that they need it out of their lives as fast as possible. 

What is a value-add property?

Investors consider a single-family home to have great value-add potential when it is priced below market because of mismanagement or poor upkeep, and oftentimes both. Homes with the most upside are generally the messiest and in need of so many repairs that the average homebuyer wouldn’t even consider taking on the project. 

But a landlord looking to grow their portfolio can snag a house in total disrepair and add a lot of value. Not only increasing the monetary value of the house but also making it habitable again and valuable to renters looking for desirable options.  

Is a rehab-ready property right for you as a landlord? 

Before deciding to take on a rehab property,  you should definitely check in on your risk tolerance and access to resources. 

The number one resource, besides capital, should be a contractor. 

  • Do you already have a contractor? 
  • Have they worked on investment properties? 
  • Will they help you to evaluate a value-add property before you buy it to use as a rental?

You may want to have a contractor do an initial inspection of the house with you to put together a rehab estimate. The one thing you can control is the rehab, specifically which materials you use for the rehab. So having an expert contractor with experience working with investors can help save you money in the long run.

With a contractor in place, consider your risk tolerance for renovation.

There are levels of rehab that range from cosmetic to a full, down to the studs, gut job.

Cosmetic upgrades like paint, floors, and appliances will require less labor, capital, or risk than a full rehab. But taking a house down to the studs and repairing all major components like HVAC, roof, electrical, and plumbing in addition to cosmetic repairs could have major upside and return on investment. 

*Pro tips from investor-friendly real estate agents:

  1. Always make room for the unexpected. Every time you flip a home, you’re going to run into something you weren’t expecting.
  1. If you’re trying to stick to a budget and refuse to go over, you might be cutting corners. It’s better to reassess the budget and make sure the house will appeal to renters in that market. 

The top four reasons to consider buying a rehab rental property.

Reason #1

Rehab-ready properties are often in locations with potential.

Emerging neighborhoods have aging or distressed homes in need of renovation. Once renovated, homes in emerging neighborhoods have more room for growth.  A great emerging neighborhood is likely already showing signs of gentrification and that is a positive for investors wanting a location with an upside.  

Emerging neighborhoods should have two characteristics that also create potential: accessibility and amenities. When these neighborhoods are close to transportation, employment centers, parks, recreation, and shopping, these are bonus external factors that will drive interest from renters. 

Reason #2

Rental demand is strong in neighborhoods with value-add properties.

Rehab properties are not in rent-ready condition, but after renovations can make for an attractive, new, and competitive rental unit. These neighborhoods are closer to city centers and tend to have more rentals than suburban, owner-occupied homeowners. 

There is also market resilience because properties in these areas have a consistent history of real estate demand. They just need available and liveable inventory to draw in more renters and to drive up home values. 

Reason #3

There are options for financing rehab-ready homes. 

A home in need of cosmetic repairs can potentially qualify for a traditional mortgage but 

homes in need of major repairs don’t often qualify for traditional financing. And this factor actually opens up options for an investor/landlord looking to add to their portfolio.

How?

Equity in an existing rental unit can be used to put money towards a new rehab property.

Private money lenders are an option for short-term financing to bridge the gap between purchase and repair before putting a mortgage on your newly rehabbed rental. 

Joint venturing with a partner on a rental property would allow you to either split the cost of the project or have the partner bring the entire purchase price in cash.

A 1031 exchange is also an option for landlords looking to exchange one property for another without paying capital gains. 

The bottom line is that these options create opportunities where you don’t have to tie up all of your own cash in a new rental that needs rehab. 

Reason #4 

There are also options for rental and exit strategies.

Buying a rehab and turning it into a rental in a single-family neighborhood creates options to rent to families long-term or midterm to traveling professionals or students who need to be in the area for shorter periods of time.

There are also options for exit strategies if you need to pivot. 

If you buy a rehab in an emerging neighborhood it’s most likely to be an entry-level home that will appeal to first-time homebuyers. With the low inventory of homes in the affordable range and as mortgage rates continue to normalize in 2024, a newly renovated rehab could become highly desirable for first-time homebuyers looking to purchase. 

At the very least, equity will rise after renovations and equity can be used to either upgrade the property further or potentially buy another rental home. 

And finally, investors who flip and rent properties generally work in markets together. The more investor activity there is in a market opens up opportunities for more investors. Every time a renovation is completed and that house is then sold or rented, it becomes a viable comparable and proof of concept. 

As investors work in busy neighborhoods, they also bring a whole new category of inventory back onto the market, flipping entire streets and creating revitalized neighborhoods. Not a bad reason to rehab and rent a home. 

Connect with investor-friendly agents to help find and buy rehab-ready properties through a national real estate investment marketplace at New Western.

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