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Bitten by the real estate bug after buying his first duplex eight years ago for $32K and moving his family into it the weekend they closed - "it was so bad it was almost condemned" he jokes -- he continued to work a fulltime job while investing on the side. Three years ago he quit his job and started his real estate business.
To date he's done almost 50 deals and owns 53 apartment units; consequently he spends most of his time rehabbing.
We asked Kevin for his nitty-gritty tips on what makes for successful rehab projects.
ForeclosuresMass Monthly: Kevin, what's the biggest mistake new investors make when rehabbing properties?
Kevin Lacasse: The biggest mistake? People pay too much to purchase the property. Most people will buy a property and rehab it, and then can't figure out why the house doesn't sell. I've had people ask me for help and when I recommend they lower the selling price, they'll often say, "We can't do that because we won't break even." That's a tough way to get into a property.
FMM: How do you determine how much you'll pay for a property?
KL: Most investors are pretty good at figuring out the After Repair Value (ARV) and then subtracting out the rehab costs. But, they'll often forget things like closing costs and real estate agent fees.
I have a worksheet that includes all my costs. The first thing I do is look at the purchase price and the comps. I'll then take the ARV and subtract from it the following:
I also subtract 10% off the ARV because I like to sell below market value in order to offload properties faster.
Once I subtract all these costs, I then come up with a final number - this is the amount I'll pay for the property. If the seller can't come close to that price, I walk away.
FMM: How do you determine rehab costs?
KL: I've been working with a contractor for two years now - in fact, I keep him so busy he doesn't work with anyone else. He and I will walk through a property and make a list of everything that needs to be done. I act as my own general contractor. My contractor does carpentry and clean-up, no plumbing or electrical, so I have separate guys for that.
Costs are dependent on how much work needs to be done. A "fluff and buff," as we call them, may need only paint and carpets; we can bang those out in a few weeks. However, we just finished a seven-family rehab - that took us five months and it went over budget.
FMM: Why is that? What happened?
KL: Even experienced investors like me get into trouble. I got killed because I didn't talk to the town before the purchase. Because it's a seven-family, it had to meet the 2005 International Building Code (IBC) regulations. [States across the country, including Massachusetts and New Hampshire, have been updating their building codes to comply with the new IBC.]
I had to put in a sprinkler system and have an engineer do a full site plan that included drainage and lighting reports. I also had to redo three levels of railings because they were built to the residential code but not the commercial code, under which the seven-family fell, so they were two inches too short.
Although I ran over budget by $40K, I didn't lose money because I was able to refinance the property at its appraised value. I still have $70K of equity in it.
FMM: Your story brings up a good question. How do you deal with unforeseen issues?
KL: With real estate, it's a fact of life that you'll have unforeseen conditions - which will always push you over budget. To cover these types of things, I designate 10% of my rehab budget for the "oops factor."
Here's a good example: Last year I bought a 1,000 square foot property. This place was covered in five to six feet of junk. We used six 30-yard dumpsters - the really long ones - and cleaned the place out.
Once it was clean, we could see what we were dealing with, and that's when we noticed the whole back of the house was pulling away from the main section. The foundation was failing as well. We had to tear off the whole back section and rebuild the foundation using post and pier as well as completely rebuilding the kitchen and laundry room.
However, I still made a $25K profit - because I had room in the budget for the "oops factor."
FMM: Kevin, do you have one last strategy you'd like to share?
KL: Have several exit strategies. If the market slows or something happens, what are your options? Will you keep the property? Can you sell it on rent-to-own or through a lease option? Do you still have room to wholesale it or can you refinance it?
Bottom line with real estate investing - always consider your profit before making any moves!
Kevin Lacasse is the Principal of New England Family Housing. He can be reached by phone at 603-279-4557 or by email at dnlhomes@metrocast.com
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