Rehab to rent is one of the smartest real estate investment strategies. It is based on buying a cheaper property, like a distressed property or a foreclosure, and renovating it to increase its value. Then, you find tenants and can charge a higher rental rate thanks to the new renovations.
Let’s look into this strategy and the necessary steps.
Is Rehabbing to Rent Worth It?
Although rehabs are usually not recommended for beginner real estate investors, there are some clear perks. You do not need to search for the absolutely perfect investment property. You can start with almost any property you find provided you do an investment property analysis to ensure you will get a good return on investment after renovations, of course. Additionally, there is no pressure to find a seller quickly (like with the fix and flip strategy) in order to avoid negative cash flow. It’s usually much easier to find a tenant to pay rent than it is to find a buyer to take on your property. Finally, you will be able to generate a high rental income upfront depending on the renovations you choose to carry out in the property.
As long as you follow the proper steps and do your due diligence, rehabbing to rent can be worth it.
The Rehab to Rent Strategy: 6 Steps
Evaluate the real estate market
The first thing to take into account is the local real estate market where you plan on rehabbing and renting out a property. You need to focus on whether or not rental properties in the area are profitable. A thorough rental market analysis will give you an idea of:
- what the monthly rental rates are in the area
- what kind of rate of return on a rental property you can get in the market
- what the most wanted rental properties are and what features they have (how many bedrooms and bathrooms, size, amenities)
Mashvisor can help you do this rental market analysis in minutes. You can explore the available rental properties in an area of choice to get to know the competition. This will show you how much you will need to improve a property in order to be competitive in the local market.
You should also do some research on the possible cost of a rehab in the area.
Related: How to Research Real Estate Markets: The Beginner’s Guide
Find an investment property
Next, you need to find an investment property for sale to rehab. Look for properties that are abandoned or vacant as these will likely need some repair and come at a lower cost. You can also look for foreclosures, short sales, bank owned homes, or properties up for auction. Visit the Mashvisor Property Marketplace to find such properties in the location of your choice. There, you can set a filter so that you only see properties that need repairs. Another option is to “drive for dollars” – get in your car and look for potential investment properties that may need a rehab. You could also work with a local real estate agent. Let him/her know that you wish to implement the rehab to rent strategy. He/she should be able to find an appropriate property for you.
Find out what the real estate rehab will include and how much it will cost
Once you find an investment property, it’s time to conduct a home inspection to see what needs to be repaired. Rehabbing real estate can mean any renovation and remodeling works apart from tearing down the house and building it from scratch again. Depending on your budget and goals, your rehab to rent can include some or all of the following:
- Remodeling the kitchen
- Upgrading kitchen appliances
- Repainting the kitchen cabinet doors, changing the countertop
- Renovating/ adding bathrooms
- Adding a walk-in closet, storage space, pantry
- Changing flooring and carpeting
- Getting new faucets, staircase railings, doors, knobs, and light fixtures
- Updating the windows to more energy-saving ones, adding blinds or shutters
- Installing a new cooling and heating system
- Installing new garage doors
- Repurposing rooms, moving walls to change the floor plan
- Repainting inside and out
- Putting up a veranda/ a pool
- Landscaping the yard
Related: Value Add Real Estate: A Complete Guide for Beginners
The kitchen and bathroom(s) are the most important spaces. If they are in top condition, it automatically increases the value of the investment property in the eyes of tenants. So be sure to set aside part of your budget for these rooms.
It is a good idea to talk to a contractor about the price of the renovations you have in mind.
Evaluate the investment property for sale
One of the most important indicators that will help you decide whether to rehab to rent is the ARV or after repair value. This is how much the investment property will be worth after the renovations. It is the sum of the current property price and the expected increase in value. For example, if you would pay $50,000 for the property now and renovate it to add $50,000 more in value, the after repair value would be $100,000. You can get a professional home appraisal done so you know the exact sum for sure.
Next, you need to know how the property will perform as a rental. You can use Mashvisor to evaluate the profitability of a certain property you are eyeing. It is a simple and automated process that will give you answers in minutes – being quick is key in real estate investing.
- If you’ve found the property through a source other than Mashvisor, upload it to the database- you will have to enter specifics about it such as the address, type, size, number of bedrooms, year built, and so on.
- Based on historical data, Mashvisor will give you an expected rental price for the property in its current condition. This is your starting point. You are looking to beat that with the rehab to rent.
- Then, you can tweak the details factoring in the cost of the improvements you plan to make and figure out how much to charge for rent to increase returns. The return on investment will be recalculated to reflect the newly improved condition of the property based on your inputs.
- Mashvisor also shows you rental comps – similar rental properties in the area and their rental price.
Related: Investing in Rental Property: Renovating for Smooth Rent Increase
This rental property analysis should be done before you buy to see the return on investment you can expect from the property when it is rehabbed. You might find that your planned rehab to rent is not enough to increase the return on investment significantly. It is a property investor’s rule to look for positive cash flow properties, especially when you will be investing with the rehab to rent strategy. So if you find you’ll end up with negative cash flow, look for another property.
Last but not least, Mashvisor helps you choose your rental strategy: Airbnb vs traditional. The platform will show you the expected occupancy rates, nightly/ monthly rates, rental income, recurring costs, and cash flow from either strategy.
Get the financing for your purchase and real estate renovation
Buying a distressed or foreclosed property may be cheaper, but renovations can cost you as much as the property itself or even more. The good news is that there are rehab loans for an investment property that you can apply for. Some of the options are:
- home equity line of credit (HELOC) on your first home
- cash-out refinancing
- rehab to rent loans against the future appraised value of the property
Keep in mind that different rules may apply for rehab to sell vs rehab to rent. When you get an offer, input the values and interest rates in Mashvisor’s property mortgage calculator to see how they’ll affect your returns.
The cost of renovations will also impact the loan you are looking to get and lenders will ask you for the split between property price and rehab budget.
Rehab and rent out the investment property
Once you close on the investment property, it’s time to carry out renovations. Hire a contractor and share with them your vision and the timeline. Do not forget that contractors need to have certifications and licenses so do not be tempted by too-low offers.
After renovations are complete, advertise the property for rent, screen applicants, and find your tenant. Soon after, you’ll start enjoying cash flow!
Getting Started with Rehab to Rent
So, to sum up, what you should do if this is how you want to invest in real estate is find a cheaper property, evaluate its potential, secure a renovation loan, hire a contractor, and then start earning rental income. Don’t forget to turn to Mashvisor along the way. To start your 7-day free trial with Mashvisor and subscribe to our services with a 20% discount after, click here.