Episode 38: During a RENOVATION, begin with the END in mind!
Summary
As a landlord, you may not consider yourself a real estate developer, but in certain points of your rental journey, YOU ARE! In today's episode we expand on the different aspects of unit recovery, that is, when a unit is between tenants. Examining your choices based on local demand, budgeting money and time, and whether you re-rent or sell the home is exactly when a landlord temporarily becomes a developer! This episode challenges you to do your homework, know your numbers and make the best choice for YOU in your rental business.
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Full Episode Transcription
Welcome to my life as a landlord where we untangle all things housing and educate the curious. If you're
looking for some entertainment with some honest, awkward conversations, you've come to the right
show. I'm your host, Dr. Jennifer Salisbury. This is my life as a landlord. Welcome to it.
Well, hello there. Hello there and welcome to my life as a landlord. I am your host, your guru, your teacher. I am Dr.
Jen, and this is episode 38 of my life as a landlord. Oh, my goodness. Can you believe it? Today is all
about real estate development and beginning with the end in mind, last week was tenant perspective.
Next week is real estate investment and I've got a rotating array of topics. And so this week is real estate
development. And just as a reminder, as a landlord, the role as a landlord automatically expands into real
estate developer whether you wanted to or not. Now, many of you may out there may not be full time real
estate developers. You may not be full time contractors. I get that. But if you've come to this podcast as a
landlord, there is certain times in your landlord journey where you will be the developer, especially when
you think of a landlord, you think of leases, you think of trouble calls, you think of plug toilets. Well,
guess what? You become a real estate developer when your unit is empty. Okay. So during the we call
that the the unit recovery during the time when one tenant has departed and the next tenant is inbound, or
maybe you haven't marketed it yet. Either way, that is the unit recovery. And as a landlord, you could
have anything to do in there. You could just do a little bit of cleaning or you might have to do a full gut
Reno all the way down to the studs. You just never know. But you could you could be doing drywall
repair, flooring, replacement, window, change out toilet fixing counters, cabinets. It could be anything.
Anything. And if your business includes housing at some point, somewhere along the line, their fellow
landlords, you will be a real estate developer. You will be remember that a developer improves properties
and usually each project is defined by a scope of work, a defined by a very, very specific scope of work.
And it has a beginning and an end and as today's topic as a landlord. But even if even as a temporary
role, as a real estate developer, you're still a real estate developer. We're going to go through some of
these options knowing that as a landlord, you're going to be a developer, especially during unit recovery,
when that unit is empty and we're going to start talking about the options of when you've got to
repair that unit. We're going to start talking about the beginning with the end in mind. Now, I have done
this exact scenario, this whole scenario I'm going to talk to you about. I've lost track. I'm thinking over
100 times. Wouldn't surprise me one bit. Maybe, maybe more, maybe less. 1s But because we have
rentals in both the US and Canada and as a landlord, you may not be a full time real estate developer, but
in this instance you are. And as we as we talk about this, I'm going to continue to give you your the same
structure, exact same structure as I normally would do in my podcasts. And that's three points to ponder.
And a call to action no different. Here we go as a landlord, real estate developer. Here's your three points,
beginning with the end in mind for a unit recovery. What does that mean? The end? Was that even mean?
May not be as obvious as you think. Second point Do your research. You need to do your research on
what fits your landlord business. And that's the answer is the business. And number three, you need to
make sure you've got a scope of work and a budget, not only in money, but also in time that helps you
create this option of whatever choice you have, what the end in mind is, what does that even mean? But
you've got to have the tools that you need to make that decision. Okay. So let's talk about first, let's talk
about for unit recovery. What does the end mean? What does that even mean? So you've got a tenant
that's left and now you you've got an empty unit, might be trashed, might not be trashed. Don't know. But
you have you actually have four options and there's probably more. But the four most common actions is
you could you could do nothing. You could do nothing. You could simply just sell the house as is and no
longer be a landlord, no longer have a rental unit. You could just sell it as is. Now, if you're going to do
that, you're probably going to lose some money. It's going to be sold at less than market rate as a discount
because it is not recovered. Depends on the state of it. If it's movable and it just needs some clean and it
just needs a little bit of paint, little putty. Okay, that's different. But if there's holes in the walls, it's not
livable. Missing appliances, missing toilets, things like that, That is going to be a harder sell. And it
would probably be sold to a real estate developer, a real estate investor like me. So but that's option
number one, is you could just do nothing and sell the house. Just sell the house as is done. Okay. That's
the first thing. 1s The second thing you could do, actually the second and third thing that involves the
renovation. So the renovations, there's two different varieties of renovations. You could do the absolute
bare minimum, bare minimum, absolute bare minimum. We call this the lipstick on a pig. It is absolute
bare minimum that you could rent it at roughly market value, probably less than market value, but as
quickly as possible, re rent it. And I'm finding that's typically what most people do because it is the
cheapest. It is the fastest, it is the fastest back out to market. Because remember during this renovation
time you are not getting rent, there's no revenue, it's all money out. So that's the first part. But there is a
second version of the renovation. You could do a greater renovation and re rent it at a higher market
value. Potentially you could be doing a bigger, longer, more expensive renovation, but the budget's going
to be higher. It's going to sit empty for longer and you might be subject to wait times and permits for a
contractor. You never know. And then of course, the fourth option is you could still do this big
renovation and then sell the house. You don't have to necessarily re rent it, so do nothing and sell. Do the
minimum and re rent. Do a bigger renovation and re rent. Do a big renovation and sell. So begin with the
end in mind. Now how do you know which one is best for you? Well, that leads to point two. Point two.
Do your research, do your research and your research are what is going on in your local real estate area if
you live out of state or out of province. And your rental is somewhere else and you are wondering or it's
been a long time since you've rented or had to list a rental for a long time. You've got to get in there and
figure out what is market rent for your bedroom, size of unit, your square footage, the amenities, what's
included, what's not included? Does it have a garage? Does it have a fenced backyard? Do you have a
common pool? Things like that where you need to know what the comps are according to market rent?
And then, of course, that's going to help figure out your cash flow. And then are you going to do a
renovation? Are you going to sell things like that? I know people ask all the time, how do I know what
market rent is? I'm going to do a separate podcast on that because there is kind of a trick to looking at
some of the other apartments for rent. But remember, those are other apartments for rent. That's not that's
not actually what's necessarily rented. So there's a couple of different ones. But when you're doing your
research, you need to know what the comparable rents are in your local area where the other rental is,
Right? Also, it wouldn't be a bad idea to do some comps for sales. Is there a huge demand for high end
homes with your square footage or in your subdivision, for example, for a single family home? Is there a
big demand for that? If there is, then you might consider doing a big renovation and then selling. What
about real estate investors? Are there real estate investors who are hungry to do flip houses and are going
to pay top dollar, which is not normal for real estate investors? However, sometimes it isn't the house,
sometimes it is the property, sometimes it's the outbuildings. There are different aspects that attract real
estate investors. And so if maybe the the demand for an unimproved home or an unimproved building is
the demand right now, maybe doing nothing and just selling the house as is is a viable option in your
area. Okay. Maybe that's another one. Okay. Let's talk about the renovation options, the bare minimum
one and then the upgrade one. What are materials costing right now? What are materials costing in your
area? How available are those materials? And then who's going to install all of that? Who's going to
demolish all that? Who's going to clean it all up? If your contractor in your area that you like to work
with is booked six months out, then maybe you're going to have to find another contractor, right? If
you're doing the bare minimum. And it's simple things like changing the deadbolts and switching out a
kitchen tap, Do you really need a contractor? Can you do that yourself? Maybe. Maybe. It just depends
on how savvy you are. So you've got to come up with an idea of what's. What's wrong with the unit.
That's the first thing, is that when you do your inspection, when the tenant leaves and you're left with an
empty unit and you've got control of this empty unit, then you're going to know, okay, to recover, this
unit is going to be a major renovation or it's not so. But you've got to have an idea here of material costs,
the timing of getting that material. Now, if you live in downtown Dallas or San Antonio or Albuquerque
and materials are very, very available and this is not an issue, great, Then you can just go literally buy
stuff off the shelf and you can get vanities and you can get toilets and things like that. When we do
renovations in our place in Canada, that's quite rural. We can't just go get Vanities. Or when we do a
renovation in Maui, we have to really think and maybe order stuff in advance. And so you have to plan,
you really have to plan. And all of this equates to time. And if you're in the middle of a renovation and
things get delayed, well, guess what? Then that's less time that your unit is rented. All right. Let's talk
about the fun stuff. What about renovation financing? Who is going to pay for all this? How are you
going to pay for all this? Is it going to be something where you've got one of those Home Depot coupons
that you can finance at 0% for 24 months and you write it out and you pay it off as you go? Or is this
something where you need to have a little bit more money if you're going to do an upgrade renovation
where it's a much higher price tag, do you have availability of either savings account, which is usually
not likely, but can you take a line of credit on the property where you're renovating, put them, put the
debt on the property, Right. That's an idea. And again, that doesn't you can't walk into the bank. Go give
me a line of credit for $30,000. That doesn't quite work like that necessarily, but sometimes it does.
Sometimes you have credit cards that can potentially say, hey, we're going to give you $25,000 at 0% for
12 months. You've got to pay it back, things like that. So if you are savvy and you're listening to this
podcast, you probably are, then you can figure out different ways to be very creative in your financing of
this renovation. Now, if you're going to rent it, and even if either way, any of these options, you have to
factor in how long the unit is going to sit empty, even if you're going to renovate and then sell or
renovate and then sell it. It's going to sit empty until it sells, right? But if you're going to renovate and
then re rent. You can't be signing a lease if you're still waiting for your vanity, if you can sign a lease.
But then you've got to. You've got to hold to it. I mean, it can get really sticky. That's happened to us
where you go, you know, the unit is empty. And I always here's my trick with with doing leasing and
trying to market a unit while we're in renovation is if somebody's going to depart on the last day of the
month, which is typical. I will start because my tenants give proper notice, which is great. I will start
marketing the the renovation or the marketing the unit in advance. And what I will do is I will give
myself an automatic two weeks, I will give myself an automatic two weeks. And so I will start
advertising and saying, okay, the tenant is departing on the 31st. The unit will be ready on the 15th or
before. And I always say or before because when people are looking at, you know, they're starting a job
or they're moving to town or maybe they're living with family, sometimes it doesn't matter if it's available
the 15th or it's available on the fifth. Because remember, until I do that condition inspection, that move
out, I have no idea what it looks like on the inside. And I don't know what we're going to do. Now.
Normally we're rent, right? We're going to renovate and then re rent. We don't normally renovate and
then sell and we certainly don't just sell as this. That's that's us because of our skill set and our our
experience. But in your particular situation, you've got to make the best choice for yourself, still doing
your research, making sure you know the comps in your area for rentals, comps for sales, renovation
items, costs, availability, timing, your contractor availability, the contractors cost, potentially giving a
budget, financing all of the above. How long is the unit going to sit empty and then depending on.
How you want to play this. If you want to sell it, just know that as a real estate, as a landlord, we're
talking about real estate improvements. But if you're going to sell it as a landlord, then you've got to also
know that you potentially could have some tax liabilities for. Some tax liabilities for capital gains and
things like that. Right. Especially if you haven't lived in it yourself. So we want to make sure that you are
aware that if selling is one of your options, if you really are going to consider selling that you understand
what that is, ask your accountant. Say, Hey, if I improve this or if I don't improve it, if I sell it, what
roughly? And they can give you the calculation. And at some point in the future, we'll go through
calculations too, about how how do you calculate the tax liability as you go? Okay. As a landlord with
your real estate developer hat on, we just talked about the four options of what what the options are at the
end of a renovation or at the end of a unit recovery. What is it you can sell or you can renovate and re
rent or you can renovate and sell. But to make that choice, you've got to do your own research. You've
got to figure it out and figure out what works for you. So let me give you a scenario here, right? Like I'm
always giving you a scenario because this is real life. If you're a landlord listening to this, you're either
about to be a landlord, you're a property manager, or you're already a landlord and maybe in a pickle and
you're trying to educate yourself. So let's talk about a scenario ready. So you've gotten yourself into a
pickle. The tenant was not properly screened for whatever reason. You weren't helping. You weren't
listening to this podcast. So the tenant wasn't properly screened. You went through a terrible, terrible,
drawn out, stressful eviction, no rent paid for months and months, and there was wilful damage. Now,
remember, wilful damage is deliberate damage. Normal wear and tear is not deliberate. Okay. So that's
the first thing. Okay. So here's here's a list of the damage. You don't need to just keep notes on this, but
just keep track of some of this in your mind. Two kicked in doors, many punched walls, including past
the drywall 1s closet, doors missing and broken crayons on all of one bedroom. The kid's bedroom was
just colored to death with crayons all over the place. Plus the kids bathroom. Walls on all walls, including
the tub surround. Carpet is heavily stained, but there is a chance you could save it. The kitchen floors and
counters are scratched. There is a loose step on the front steps and there's a staircase handle that's fallen
off. I guess this is a two storey house. In this scenario, staircase handle is fallen off with some drywall
damage. So it looks like somebody was hanging on the staircase, handle lots of garbage. And there
appears to also have been abandoned items. And one more thing. The front door locks are broken right
now. To get into the unit, you actually have to climb in through a window. Okay. So that's the scenario.
That's what you're getting after this terrible long eviction. Now, if this is all that is, consider yourself
lucky, which is good. All right. So let's go through each of the options in this scenario for recovery.
Okay? So if you're going to do nothing and you're going to sell it, as is very simple, do nothing, do well,
you might change the front door lock. That might help, but you're going to market it as is to a local real
estate investor. Probably someone like me and Michael. You're going to call a realtor and they're
probably going to sell it as a pocket listing meaning, and they may even buy it themselves because that's
what realtors do, is that they're on the they're on the hunt for a real estate investment as well. So you're
going to sell as much as you possibly can for as much cash, $0 in renovation, because you're not
renovating unless you're going to buy $100. Deadbolt, You're basically going to get low market selling
price because it's not considered moving. Ready, Right. Even even just a little bit that I explained, It is
not perfectly moving ready, which means you can't have somebody living in it right this second. You're
going to have to do something to it. But if your first option is, you're just going to say screw it and just
sell it as is. There you go. Okay, let's talk about bare minimum renovation. We call this lipstick on a pig.
Lipstick on a pig is just very, very bare minimum. But here's the trick, Mr. and Mrs. Landlord, you still
have to do some basic items regardless of what renovation stuff you're doing. Because if you're going to
rent, it still has to be safe and it still has to be secure. So let's see. In the list of stuff that I rattled off, there
were two safety items in one security item. So the safety items to rent the loose step. On the front steps is
fixed. Loose step is fixed and the staircase handrail that at absolutely minimum, you cannot have safety
items in your rental as an issue. You must have those fixed regardless of what renovation you do. And
then the security item, front door locks busted. You have to replace it. Simple. You must have safety and
secure stuff. Okay. But all else you can do the bare minimum in this scenario. Okay. So if you're going to
do no upgrades, you're going to you're going to do the drywall fixes, which is includes the dry, the wall
punches and the staircase handrail When there's drywall damage, including you're going to paint those
select walls only you're going to fix the drywall and then repaint those select walls. You're not repainting
the whole house, just those walls. You're going to have to either replace or patch the doors that have been
kicked in or the closet doors. You can leave them off. You don't have to have closet doors necessarily.
It's not the ideal, but you can you can clean the crayon off all the walls and the tub. That might take
a bit of doing, but you can do it. Clean the carpet only. No replacement. Just clean the carpet and then
just leave the kitchen counters and floors. That's the way it comes, right? That would be considered a
lipstick on a pig bare minimum renovation. Now, with all of that, that is still at retail, not as a married to
a contractor at retail. I approximate that Reno at $8,000, $8,000 and two weeks if people are available,
especially if you've got your drywall or now am I on the high side? Maybe. But remember, I'm used to
operating in Maui, Hawaii. So that's my take on that. Okay. So that's lipstick on a pig. Let's talk about a
greater upgrade, renovation and then rerun. Let's talk about that one next. Okay. So what that would look
like, as I mentioned, you're still going to do the safety and security items except the tricky front step, the
loose front step. You're not going to just fix it. You're going to replace the whole staircase. You're going
to replace the whole staircase, which is good. You're going to get a new front decor lock, maybe even a
new front door, especially if it's been ridden hard. If you're going to try to get high end market for this
market rent for this, then you want to do it. Okay. Some of the other upgrades you can do is that you can
remove the soiled carpet. Maybe you put in some luxury vinyl plank drywall fixes and remove the
crayons and then new paint throughout the whole house. Different, different than just doing select walls.
It's going to look a lot cleaner, a lot fresher, replace the kitchen floors, replace or potentially upgrade the
counters. If you've got Formica counters that are scratched and you want to put in some granite, for
example, then you can do an upgrade door replacement where they're kicked in and the closet doors are
missing. Replace them all. I would remove the tub, surround completely remove the tub, surround
that's been crayon over and potentially put in a tub insert and then tile it. Now again, you can hear as I'm
talking about all this, the price tag is going up, right? You can hear this. So this is where you've got to go.
And look at the numbers. You've got to look at the numbers. So let's talk about one other thing. 1s But
before we do so, this is the higher end, upgraded renovation and re rent. This is about $30,000. Reno
High market rent. But again, does your local market support that? Do you have a demand for that kind of
thing? Maybe you do. And that's where you've got to know. But let's say you're not going to rent it after
this high end Reno, you're going to sell it. Then you might you might consider doing one additional
thing. You might completely rip out the kitchen cabinets and the vanities and redo cabinets and vanities.
When you do that kind of stuff, you're you're starting to really up up the value there. Then all the things I
mentioned plus changing out the cabinets and the vanities, that puts it at about a $45,000 rental. Now,
knowing that budgeting time and money is part of this discussion, I'm betting that not many people have
30,000 or $45,000 in these genes. Right. So you've got to figure out how are you going to pay for this?
And like I said, this is part of the real estate investor being money savvy in your landlord business.
You've got to figure out how does this actually work? And do you want to try to put a line of credit on
the house? This is part of your research and choosing how to do it. Okay, so there it is. You may not be a
real estate developer all the time, but you will as a landlord, be a real estate developer at different points
of your journey. And unit recovery is the most obvious place that you're doing. But as a challenge, your
challenge as a landlord is to know your options with your units in between. Maybe it's time to sell.
Maybe, maybe one of your tenants wants to buy it. They want to buy the house or something. Like
Crazier things have happened. We have sold houses to tenants before. 2s So that's the first thing. Know
your options. Do your research in the direct comparable area in where the rentals are located. So if you
want to renovate and sell how that sale will play out, you need to do the budget on the whole thing about
how am I going to get financing, what is that going to cover, What's the availability? How long is the unit
going to sit empty, All of that. And then three, you've got to make that choice that is best for your
business. Include not only budget but time specific scope of work and contractor availability. And then I
have to put an asterisks on this, folks. You've got to know that something unexpected will always jump
up, always something unexpected. And your time and your money. Budgets, sadly, are always too
optimistic. You will always air on I hope it's only 5000 and it ends up at 8000. I hope it's only two weeks
and it's four. This is reality as a real estate developer and as a landlord on your real estate development
journey, you've got to so in review, know your options, do your research, make the best choice for your
business. And then get to work. Right? Okay, so here's your call to action. Even though this is a real
estate development topic in the podcast, I actually have done other podcasts before on this specific aspect
on helping you figure all this out. So there's two ones in here. There's two podcasts in here that I
encourage you as you're call to action to go back and listen to. So here's the first one need help finding a
contractor, and that's if you're going to either you're going to rent it, put it back on the market. That's
episode 13, Episode 13 of my Life as a Landlord is help finding a contractor and defining a specific
scope of work. That's the first one. The second one is financing your renovation. That's episode 2813 and
28 are the episodes that if you're looking for answers on how to support your unit recovery as a landlord,
how to do it. Oh my goodness. It's a wild ride as a landlord and this is no different. So here we go. Let
me know your comments or questions. You can shoot me an email, learn at my life as a landlord, or you
can jump into one of the many groups on either Facebook or LinkedIn. I am in all of them. You may not
realize that I'm there, but I am there and I'm commenting every day on different scenarios I see all the
time. So you'll see me either as my life as a landlord or Jennifer Salsbury either way. But next week's
podcast number 39 in real estate investment minded. It's called Tenants are part of the Asset. I will see
you there.
Thank you for joining us this week. To view the complete show notes
and all the links mentioned in today's episode, visit our website at www.mylifeasalandlord.com. If you're
looking for educational resources for getting into real estate investing, becoming a landlord, or even a
better tenant, then I have a page on my website to get you started looking for a solution to the pickle that
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Thank you again for joining me, Dr. Jennifer Salisbury in this episode of My Life as a Landlord. I'll see you next time.