IC E Lesson: Things I was wrong about part 2: You Should NEVER Rehab a Property Yourself
Last week, I started a series of articles about things I’ve changed my mind about over the years; as in, used to see them as absolute right/wrong issues, and now think of them as, well, at least 49 shades of gray.
If I were a politician, this would be called flip flopping. But I’m not, so I prefer to call it…the results of business maturity. And a second rule that I’ve lived by in the past and don’t believe in today is: No one should ever rehab a property themselves.
If you’ve been around awhile, you’ve heard this a zillion times, and probably never questioned it. Especially since it’s often accompanied by the seemingly-irrefutable math that “every hour you spend painting an apartment is worth the $25 it would cost you to hire a painter. If you can’t make more than $25 by spending that time going out and finding the next deal, there’s something very wrong”.
And after decades of watching my college-degreed, millionaire-on-paper father come home just long enough to eat dinner and then go out to fix a boiler from 6-11 p.m., I came to the conclusion that this argument was probably dead-on correct. But over time, I’ve also come to the realization that, for some people, the “never do your own work” thing is just not practical, and that, in fact, if some folks aren’t out there slinging hammers in their own properties, the real estate world just won’t work.
It’s still true that it doesn’t make sense for a high-earning, highly skilled real estate investors, but for a certain kind of buyer and property, it’s really the only option.
Take, for example, the thousands and thousands of properties in this country that, because of years-long vacancies as owners have walked away from their properties and banks have been slow to repossess them, are effectively shells.
In many parts of the U.S., these properties are literally worth less than what it would cost you or I to fix them up if we used licensed contractors, pulled all the permits, and bought all of our supplies at the closest big-box stores.
These buildings represent a huge social problem: they don’t house anyone, and are largely in neighborhoods that NEED affordable housing; no one is paying the taxes, which means the schools/zoos/cities/counties aren’t getting money they need to balance their budgets; they attract the criminal element; they make every property around them less valuable and desirable; and it costs taxpayers an additional $20,000+ to tear each and every one of them down.
I’ve come to the conclusion that the only free-market system that gets these blighted properties back into the economy is a non-ideal but necessary one: do-it-yourselfers on the bottom end of the economic spectrum have to bring them through the first few stages of rehab, so that they can eventually become fully functioning properties again.
I’ve seen this happen time and time again, and although we might wish it could be different, it works. Here’s how:
A property that’s been vacant for 5 years sells to a rehabber for $1,000. You or I would say he overpaid, because it needs $45,000 in labor and materials, and will only sell for $40,000 when finished.
However, the DIYer doesn’t spend $45,000. He spends $7,000 on materials, by buying used furnaces, patching the roof instead of replacing it, getting leftover materials from his contracting jobs and his buddies, using the tub he found by the side of the road, etc. He does his own labor, or trades with his contractor friends on things he doesn’t know how to do himself. He REALLY skimps on the cosmetics, patching walls instead of replacing them, using mismatched peel and stick remnants on the kitchen floor, putting a new plywood door on the kitchen cabinet instead of replacing it, etc.
Yes, it takes him a year of his spare time to do this. And yes, what he ends up with is what you or I would call a slum property. And yes, he rents it for $600 a month instead of the $750 he could get if he did a “real” rehab.
BUT…now the property has a furnace. Now it has plumbing. The roof doesn’t leak any more. It’s not continuing to degrade. Some family is, frankly, thrilled to live in a “substandard” unit at a payment that they can actually afford. You and I didn’t have to pay to tear the property down. And the DIYer, who is probably a minimum-wage, semi-employed contractor, is now making over $200 a month in extra income—good for a whole week’s worth of groceries for his family of 5. If he does this 10 times, he’s probably making more off of his “rentals” than he is at his job.
And maybe when he gets his tax refund, he’ll actually put on a new roof. Maybe he’ll trade one if his tenants a months’ rent to rebuild the porch. Or maybe he’ll just do the minimum possible maintenance until he’s ready to sell it in 10 years. But at least next time it sells, it will be further along the path to fully functional.
If you’re saying, “No, that’s just wrong, everyone has the absolute right to live in a house that’s just as clean and safe and nice as it can be, permits are there for a reason, these people shouldn’t be allowed to operate like this”, welcome to the world of real-life, we-can’t-afford-as-a-society-to-do-everything-exactly-as-we’d-like-to ethics.
The reality is that if these people did things the way we do, or want to do, there would be NO ONE to buy and even partly renovate these properties, and that would, in my opinion, be significantly worse for our older, poorer areas than what these folks do.
And if you don’t believe that we need MORE do-it-yourselfers who are willing and able to tackle them, even when they do so badly, I’d like to invite you to Cincinnati to take a little tour of some of our finer area.
So yes, some do-it-yourselfers need to stop stepping over the dollars to get to the dimes by “saving money” doing their own work.
But many, because their skills in doing work are far greater than their economic resources or ability to spend that time “doing the next deal”, HAVE to get in there and swing the hammer and breathe the drywall dust and cut their hands to shreds bending ductwork.
And before we judge them from our position of having access to money and credit, we should step back for a second and recognize that “bottom feeders” provide the very valuable service of keeping the bottom clean.