I joined T&H Realty Services in 2018. In that time, I’ve turned and rehabbed roughly several hundred Indianapolis homes, around 70-100 a year. I’ve learned a lot about managing successful residential construction projects for our investors. Here are some of the keys I’ve discovered to managing a project successfully.
Note: The process outlined below begins at the acquisition of a property. The process of turning a unit between Tenants will be different.
Success Lies In The Groundwork
There are three items which we feel are critical to have before beginning a construction project on a new investment rental property:
- A long-term investment strategy for the property
- A home inspection report
- An in-person walkthrough
Your Long-Term Investment Strategy
Every investor should have a long-term investment strategy for their property. At a minimum, the strategy should include an expected timeframe for holding the property, your rehab budget, funding reserves, a refinancing plan (if relevant), and an expected timeline for major repairs (HVAC, roofing, etc). Your investment strategy will help you to determine what work should be done immediately and what work could be deferred.
Take a moment to review your investment strategy prior to preparing your scope of work and ask yourself the following questions:
- How long do you intend to hold the property?
- If you plan to sell it within the next five years, do you expect to sell it to an owner/occupant or another investor?
These two questions will help you determine the types of finishes and amenities you’ll want to use at the property. For example, if you expect to sell the property to an owner occupant in three years, it might make sense to install a granite countertop rather than a laminate countertop. On the other hand, if you plan to hold the property for 20 years you might spec a 30-year shingle for a roof replacement.
Home Inspection Reports
A home inspection report is an exceptionally useful tool. We recommend them for all of our investment clients. A good inspection report will accomplish the following:
- Identify major defects or issues.
- Assess the overall condition of the major components of the home (roof, foundation, etc).
- Identify safety hazards.
- Identify issues that may have an adverse impact on the future condition of the home.
If you’re not a local investor, reach out to a local real estate agent or property management company and ask them for a home inspector recommendation. They’ll be familiar with the home inspection companies in their city.
The home inspection report is also an important tool when negotiating repairs or credits with a seller. One thing to keep in mind about a home inspection report–while it is thorough, there are some things that aren’t in the inspectors scope. For example, they’re not looking at the cosmetic condition of the property or the grounds in general. The home inspector also isn’t going to make a determination if something should be repaired or replaced. Simply put, a home inspection report is only a piece of the puzzle when it comes to preparing a scope of work.
The final piece of the puzzle is an in-person walkthrough of the property. At T&H Realty, we call this an onboarding evaluation. The onboarding evaluation is a thorough and methodical walkthrough of the property. We use a best-in-class evaluation tool that breaks down the home into categories of work. As we walk through the property we document everything using a combination of detailed photos, videos, and 360 views of every room.
A good onboarding evaluation is a useful tool when communicating with your contractors so be sure to include clear documentation of the items you’re considering for repair.
Preparing A Clear Scope Of Work
With all of the documentation pulled together, it’s time to prepare a clear scope of work. As you pull together your scope, keep a few thoughts in mind:
- Rehab costs generally increase 3-5% per year.
- What amenities or finishes are comparable rental properties using to attract tenants?
- Will this repair add value to my asset?
- Will deferring maintenance make it more difficult to lease the property?
These thoughts will help guide you to the right decisions when preparing your scope of work. They’ll help you keep in mind that a good long-term investment strategy goes beyond cash flow and dollars spent.
We tend to take a triage approach to my scopes of work. We call them the must’s, should’s, and could’s.
- Must items are generally health and safety items or items that must be completed for a property to meet our minimum standards.
- Should items are generally repair items that could have a reasonable risk of causing further deterioration or additional cost if deferred.
- Could items are things we could do, but could be deferred without much of an impact to the home or the marketability of the property.
It’s generally best to avoid deferring work. As noted above, construction costs increase roughly 3-5% annually (much more than that during times of higher inflation) which means it’ll never be cheaper to do the work. It’s also important to take financial strategy into consideration. A home in good condition will always appraise for more than a property that has deferred maintenance. Finally, a home in good condition tends to attract a better quality of tenant and is more likely to fetch a strong rent. Homes with deferred maintenance issues may require a reduction in rent.
The point where we’re at in the rental season also has an impact on a scope of work. Here in Indianapolis, the busiest part of the rental season runs from April into September. The slowest part of the season runs from mid-November into January. The slowest part of the season is a great time to address work that takes time to complete. Kitchen and bathroom remodels are two good examples of work that’s best done in the slow season.
Breaking Down The Scope Of Work And Selecting Vendors
It’s been our experience that it’s more cost effective to spread out a scope of work to several vendors rather than assign all the work to a single vendor. It’s very rare for a vendor to be well suited for all aspects of a large project. Additionally, we have the advantage of an in-house labor team that charges a time and material rate (T&M).
T&M tends to be the most cost effective route when dealing with small, “screwdriver work” but you have to be very careful that costs don’t spiral out of control. Be very hesitant to work with a new vendor on a time and material basis.
It’s also important to vet your vendors. Check the contractor’s website. Search out and read through their reviews. Verify they offer the services you need in the location of your rental property. Contact them by phone and introduce yourself. Here are a few questions to keep in mind when vetting reviews:
- Are the reviews recent or from a few years ago?
- Are they clustered in small timespans, or are they spread out over a larger timespan? A small clusters of reviews can be a clue the vendor doesn’t work consistently.
- Do the reviews give a detailed story of the work done, or are they just a character review? Vague reviews shouldn’t be considered.
If you’re part of a local investor community in the market of your new property, reach out to the members and ask them who’s in their vendor network. They’ll often have good insight on who to use and who to avoid. Referrals are a good start to determining whether or not a vendor is capable of completing the work.
Knowing a vendor’s services, capacity and availability is also critically important. A small vendor with a crew of 1-2 guys can very easily get over-committed and fall behind on timelines. For a larger project this can cause a domino effect. There are times where a vendor with a greater capacity is worth the difference in cost.
We can’t understate the importance of a vendor who communicates well. You’ll get early clues as to a vendor’s communication habits as you vet vendors. Vendors who are hard to get ahold of or don’t provide a clear written estimate generally tend to be more problematic down the road. Ideally, you want a vendor who will update you weekly on large scopes of work and utilizes some quality assurance processes to avoid re-work or missed work items. Poor communication can be a strong sign that a contractor might not be the right choice.
How Funding Can Impact Your Construction Project
Some investors will use hard money lenders for their projects. Hard money lenders will typically release portions of funding as repairs are completed. It’s important to let your contractors know if you’re using a hard money lender.
Most hard money lenders will require that work is inspected by a third party before they’ll release more funding. It’s important to let a vendor know how the release of funds will work and what milestones will trigger an inspection. Also keep in mind the lender won’t release funds for a partially completed work item.
It’s important to break down large work items into smaller steps. For example, a work item of, “remodel kitchen”, means the hard money lender won’t consider any kitchen repairs completed until the kitchen is finished. It’s better to break down a kitchen remodel into smaller work items like “purchase and install cabinets” or “rough in plumbing and electrical”. Breaking the work down into smaller steps will keep the money flowing.
Finally, be sure that both you and your vendor understand the up-front funding needs and the timeline for payment. A clear understanding of these items will prevent issues down the road. Our advice is to have this conversation with prospective vendors as you’re vetting them. You’ll probably weed out a few vendors before you request an estimate.
We just touched on the importance of a detailed estimate, but it begs to be repeated. Make sure the estimates you receive are clear on the work that’s being bid. This is especially important when working with new vendors. Clear and concise estimates will help you to avoid misunderstandings over quality expectations or important material choices. If you want something replaced, rather than repaired, make sure it’s clear in the estimate.
An estimate doesn’t need to list every screw, nail and board to be used. Most vendors won’t break things down to that level of detail. However, if you want plywood cabinets rather than MDF cabinets be sure that’s clear in the estimate.
Before you’re ready to approve estimates be sure to check with the contractors and make sure their availability is still in line with your plans for the project. It’s also a good time to touch base on your communication expectations. If you’re using multiple vendors let them know the timelines of other work.
If you’ve sought multiple estimates for your work, keep in mind that the best choice goes beyond the dollar amount. Some contractors are well suited to get your new property rent ready quickly. They probably employ a higher class of skilled worker and their prices will reflect that. The cheap guy may not be well equipped to take on a large rehab project.
Remember, vacancy is a cash flow killer. Not only are you paying for a rehab project, you’re also covering the mortgage payments and utilities. The sooner your property is ready to lease and generate income, the better off you’ll be.
- A good estimate is clear and concise. Important details and material requirements should be in the estimate.
- Choosing the right estimate goes beyond cost. Keep timelines and capabilities in mind.
- Sometimes the timeline and vendor availability will rule out an estimate.
As work gets underway communication becomes a critical key to a successful project. A consistent tempo of communication will serve to keep your construction project moving forward in a timely manner.
Talk to your key contractors regularly, but keep in mind there is such a thing as too much communication. You want to keep the proverbial hammers swinging. We’ve found that 15-minute meetings each week are generally sufficient when working with contractors who are organized and communicate well.
If you’re using multiple contractors for your rehab project, touch base with them as other work at the property begins. Make sure any work that will impact the next step will be done and ready on time. You don’t want your flooring contractor showing up while the painter is still in the process of painting the interior walls. If things are off-track, communicate that to the vendors who will be doing the next portions of the repair. They may be able to adjust their schedule to avoid further delays.