Last week, I went over Key #1, so this week let’s learn Key #2 shall we? Although there are many moving parts to apartment rehabbing, I have found through the years, common things that lead to great success. I follow these and implement them wherever I go. Here they are.
Five keys to successful apartment property rehabbing:
- Key #1: Make physical and cosmetic improvements to the property
- Key #2: You are in the construction business, so be good at it
- Key #3: Be in a strong location and know your market very, very well
- Key #4: Focus on the net operating income and know your cash position at all times
- Key #5: Have more than one razor-sharp exit strategy and be flexible to market changes
These 5 keys are simple to understand yet are very expansive in content. Read on.
Key #2: You are in the construction business, so be good at it
What I mean by construction business is not knowing how to put up sheetrock or hammer a nail straight, but to learn how to manage the construction component of your rehab. When you are rehabbing an apartment property, you may be doing the following construction work: demolishing walls, putting in new door and window frames, replacing ceilings, new roofs, laying down new asphalt for the parking lot, running new electric, replacing old plumbing lines, just to name a few.
Most of my rehabs had this type of work done, but I didn’t personally do it. In fact, I don’t have the skills to do hardly any of that work. I did, however, manage ALL of that work, from start to finish – from getting the bids, to hiring the contractors, keeping them on schedule, watching the budget like a hawk, approving the completed work, and finally paying the contractors.
There are two schools of thought here:
- Hire a general contractor to overlook all of the construction or
- You be the general contractor
I prefer to be the general contractor (GC) for my rehab projects. The main reason why I prefer being the GC is for costs reasons. GCs are expensive and can be cost-prohibitive to a project. Most GCs will ask for a lump sum fee and a percentage of the profit. The second reason is that there are so many GCs out there that lack integrity (to put it nicely).
5 Tips on hiring a general contractor (GC):
- Get a referral for a GC from someone who has employed that GC and was pleased with the work of that GC.
- Interview at least three GCs, check their references, validity of the licenses, track record, and their insurance.
- The GC’s availability is key. If they are so busy with other jobs, they may not be able to meet your time schedule.
- Get the advice of an attorney or insurance agent who’s experienced in rehabs to make sure the project and the GC is well-insured. Have the GC name you as “additionally insured” on their policy.
- Use a local GC. This is important if he is called back to redo some of the work.
Tips for You, the General Contractor (GC):
- You will be the construction manager, so put on your manager’s hat. Treat this as a high-paying job because you are in fact capturing the profit the hired-GC would have made.
- Get your attorney’s and insurance agent’s advice and follow it concerning what licensing and insurance coverage you’ll need for the rehab and in employing sub-contractors.
- Avoid the urge to forgo getting the right building permits and bonds.
- Constantly work on increasing your construction management knowledge and skills.
Stay tuned for Key #3 next week!