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The vast majority of rehab loses money

Posted by John T. Reed on

Much talk about rehab as a source of profit online and on TV.

But little evidence of understanding that only a rare few kinds of rehabs are profitable.

I suspect those talking about rehab are buying a building, rehabbing it, selling it for more than they paid for it, then assuming the rehab was the source of the profit. Bull! Assumption is the mother of all screw-ups.

In fact, the source of the profit was marketwide appreciation. The rehab per se lost money—not even close to being profitable.

To interpret the matter correctly, you need to investigate what the marketwide appreciation was during the time period was. What is left after subtracting that from your profit was possibly due to the rehab.

Some salient points:

There is no profit in bidding against newlyweds and novices who are utterly incompetent at identifying profitable value-adding opportunities and executing that value-adding. They overpay.

A good starting point is a property where the newlyweds and newbies run away. Examples of when does that happen?

• tilted foundation

• overpowering pet urine smell

• asbestos contamination

• property occupied by bikers, homeless, drug addicts, squatters

• property has been turned into a junkyard and/or vegetation jungle

Do all those produce profits? Not necessarily. You need to be able to recognize that which can be cost-effectively fixed and which cannot.

Can you fix a bad neighborhood? By definition, no.

But you can sometimes move the building to a better location profitably. Again, newlyweds and newbies just see such properties as bad neighborhoods. To rehab profitably, you must have what all experts in all fields have: a sort of x-ray vision that lets you see through the disaster to the cost-effectively changed property.

To move a building profitably, you need to have the better location, permits, and a physical path to get there. Moving a building is expensive, but sometimes cheap enough to do profitably. If you can use a river, the cost-effective distance can be large. Power and commo lines can be cut and re-connected. Overpasses or bridges that are too low, however, are killers.

Reducing the load factor is often profitable. I see no mention of it online or on TV shows about rehab.

Load factor is a non-residential term. It refers to indoor space that is not being rented:

• lobby

• hallway

• alley between multistory buildings

• store rooms

• cavities under or above stairways

• overly large rooms

Am I saying eliminate all lobbies? No. In most buildings that have them, they are required, but they may be bigger than they need to be.

Let me take one example—a dead-end hallway. An office or residential building has hallways that end in a window to the outside. The nearest doors to the window are, say, 20 feet from the window.

Build a wall across the hallway just past the doors and make what was hallway part of an expanded office or apartment in the former hallway.

And you can do this on every floor. Actually, you do not need the window; just the dead end.

Online and other sources like HGTV are full of BS about making a profit by doing cosmetic rehabs. There is no profit in buying fixers and turning them into houses that need little improvement. There is no profit in doing the usual rehab—painting, adding a bathroom or a deck.

Here is a review I did of one rehab TV show.

Remodeling Magazine does an annual study of a dozen or so rehab popular projects. They show the cost to incremental resale value. Every single year, every single one of them shows a less than 100% payback. In other words, every single one of them is a money loser. The rehabber would have made more money if he had not done the rehab.

The profit is in buying disasters and selling them as fixers. Get the fast buck, not the last buck, because the last buck is a losing proposition. If the property is not driving away would-be rehabbers in droves, you need to run away from it.

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