What it Is Rehab & Rent and How Does it Work?

     A Rehab and Rent (or lease) transaction occurs when you purchase a property from a distressed seller at a deeply discounted price, and then rehab it to make it suitable for a renter. Once the rehab is near completion, you market the upgraded property to qualified tenants or lease option buyers.

     Only reasonably experienced, savvy investors should attempt Rehab and Rents on their own, in the early part of their career. The complexity and risk is the highest of all the Profit Models, due to the cost, time and project management risk associated with rehabbing, and the long-term property management responsibilities of being a landlord.
 
     Once again, Rehab and Rent is the most advanced Profit Model, and previous real estate and investment experience or mentoring by an experienced rehabber and landlord, is very highly recommended. If it were our money, we'd make previous experience with fixer-uppers (Rehab & Flip's) a requirement.

MATRIX RATING: High Risk, High Complexity

INVESTOR LEVEL: Only reasonably experienced, savvy investors should attempt Rehab and Rents in the earlier part of their career (on their own). The complexity and risk are the highest of all the residential real estate investment strategies due to the cost, time and project management risk associated with rehabilitation and long term property management. Even for the handyman rehabber who plans to do most of the work themselves, properly assessing the condition of the house, estimating repairs, assuring local code compliance and more are some of the many issues to be managed and mitigated. Furthermore, properly screening potential tenants is key to minimizing future property management headaches.

WHAT'S REQUIRED: Familiarity with real estate contracts and physical building construction and renovation estimating/techniques is a requirement. Credit, if you plan to purchase the property and own it personally. Cash or credit financing to pay for the rehab, carrying costs and contingencies (unforeseen costs). Also, being stuck trying to evict a non-paying and troublesome tenant can be a big hassle. Make sure you understand the landlord tenant laws in your state and have your rental/lease agreements prepared by or reviewed by a good real estate attorney.

WHAT'S OPTIONAL: Good construction or rehab project management software to help manage cost, schedule and performance of rehab work. A software application to help with property management would also go a long way to track tenants, management expenses, evictions, maintenance, repairs and more.

WHAT'S ADVISABLE: Extend your due diligence to find reputable contractors to get you estimates for repairs - BEFORE YOU BUY THE PROPERTY. Even if you consider yourself a handyman, get 1 or 2 estimates for each major item you plan to renovate and be sure to increase these numbers by 10% - 30%. Due diligence is much less expensive and time consuming than "winging it" when compared to not doing it,  only find out that you missed important items or have to redo work done improperly or poorly.

Also, be sure to get reputable contractors and subcontractors to quote and perform the work you don't plan to do yourself. In terms of managing the property, you have to weigh the benefits and disadvantages of managing the properties on your own - based on your experience and comfort level. You can always hire a professional property management firm if being a Landlord is not going to be your full-time vocation.

ASSESSMENT: Rehab and Rent is a an excellent long-term, traditional investment vehicle for a handyman investor who can buy undervalued distressed properties at a discount, fix them up and hold them long term for the many benefits of equity appreciation, cash flow, loan reduction and tax benefits. All things considered, this is the traditional way to build long term wealth in real estate. All of the other "pre-foreclosure" Profit Models generate cash, but not the long term equity growth (potential) and passive income possible with Rehab and Rent.

BENEFITS: For a qualified Dealer or Landlord investor who is comfortable with managing the rehab project, Rehab and Flip is a great way to leverage "handyman" skills for higher profits. The returns on an investor's time as a rehabber working on their own project are typically much greater than if they were to work and get paid as a contractor only. The real benefits of buying, rehabbing and renting are the long term benefits of cash flow, equity appreciation, loan reduction and tax savings.

CHALLENGES: The biggest challenges with a Rehab and Rent are the money and time risks one must take to acquire the property, get accurate rehab estimates, hire contractors, manage contractors, perform/supervise the work mitigating setbacks, and paying carrying costs while the property is being worked on. This type of Profit Model requires the most out of pocket cash to pay for rehab and property carrying costs. Once the property has been rehabbed and rented, the biggest challenge will be the ongoing management of the property including repairs, maintenance, maximizing rental income, occupancy and processing tenant evictions when they become necessary.