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Big Mistake Contractors Make When They Rehab Homes

Performance Property Real Estate Question

Q: Gerald, my husband and I recently bought our first rehab property.  My husband is a carpenter and general contractor so I’m not worried about the renovation.  Do you have any tips for us so we avoid making mistakes?  Janice, Wyckoff, NJ

A: Hi Janice. Congratulations on starting your first rehab deal!

In general, having a background as a contractor gives your husband a perspective on renovating that other new investors probably lack, however, the big mistake contractors often make when they buy and renovate properties themselves is over improving property–by that I mean, for example, installing custom, high-end cabinets and granite countertops in a home in a moderately priced working class neighborhood.

Just because you can do something doesn’t mean that it makes economic sense to do so. Contractors often have experience doing very intricate, beautiful, time-consuming and expensive home renovations and often jump at the opportunity to show off their skills, the way artists often do–I say that as a life-long musician myself. The problem with that approach is that investors need to focus on maximizing their return on investment not landing their home renovations in better home and gardens magazine–when you rehab a home, you are an investor not Vincent Van Gogh.

In order to maximize ROI on a rehab investment, whether you sell or keep it as a rental, it’s important that you renovate in a way that is consistent with the other homes for sale or for rent in that neighborhood. If you go overboard on renovation costs in an attempt to create a masterpiece, you will reduce or eliminate your profit because residential home improvements on average only raise the value of the renovated property by 50% of the renovation cost!

If you buy a home that needs to be renovated, it’s ok to do the renovations, but make certain you don’t overdo it because you will be unlikely to recoup the additional costs in higher market value when you sell or rent the property at the end of the day.

Good luck, Janice. For more real estate information and tips visit my blog at geraldlucas.com.

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