The last thing you want is a money pit!

If you follow my Street Smart System and do everything correctly, you should be able to avoid having to plunk down lots of your own money in rehabbing a property. Before you decide to make an offer on the property, do the math! Make sure the cost of repairs plus the purchase price on the house PLUS the profit you want to make will not cost you more than you can sell the home for. Be sure you can see a significant profit that will wipe out risk and deliver a clear profit to you.

Having the right size home will make a difference too. Most people want to live in a house that has a minimum of 3 bedrooms and 2 baths. Unless you live in a place like Manhattan, where a one-bedroom studio can fetch a million, or in a place like Chicago, where the demand for a one-bedroom one bathroom condo has driven their price close to $300,000 or more, stick with the standard working-class neighborhood homes.

Evaluating the properties can be easy if you just follow the paperwork in the Street Smart System. Typically, dealing with contractors can be a tricky thing but there’s a system in place to cover you. You won’t have to pay more than the estimate; you can control the timeline, and make sure the place is cleaned up before the contractors ever leave the site.

Getting with the contractor before you make an offer on the house will help you evaluate if the house is a good deal or not. Using the “Scope of Work” is the best way to go. Once you purchase the house, there shouldn’t be any surprise repairs come up that will drain your profits.

Scope of Work: This is broken down room-by-room and item by item based on each of the 6 trades.

1. Plumbing
2. Heating & Air Conditioning
3. Electrical
4. Roofing
5. Painting
6. Carpentry General

We make sure that everything is covered, even items you may not even think about. By doing your homework first, you make sure everything you agreed on is done right or you don’t pay. Instead of just going through each room and showing the contractor what you want done, you actually make a DETAILED list so there is no room for error. The estimate from the contractor is based on the Scope of Work, not the back of the envelope that the contractor was taking notes on.

Before the contractor even picks up a hammer on your property, you will know:

• Exactly what is included; fixtures, paint, cabinets, etc.
• How long it is going to take. You can offer a bonus if done early or penalty if not done on time
• How many crew members have to be on site all day, every day
• The condition of the house before the contractor gets the last check

All this is done to protect your assets and ensure the contractor doesn’t run off with your money and the job not complete.

Another way to get a property up to par is by allowing the tenant to do a “Work for Equity Program”. You allow the tenant to move into the property “as-is” and give them credit towards the cost of the home, it allows you to get cash now and have cash flow later. AND you end up owning the asset. As a side note, it helps to get tenants in there that are plumbers, painters, carpenters, electricians, etc.

Here is an example of how this is done:

Let’s say you have a house that’s in need of a facelift. Instead of going in there and replacing the carpet, cabinets, fixtures, and paint, let your tenant do it. You get a painter as a tenant and he repaints the entire house. You get the rent and a painted house. The painter moves out – you move in an electrician. The electrician works on upgrading the wires in the house. The same thing, you get rent, and they work for equity. This process can repeat itself until you have a completely renovated house and you didn’t have to pay a dime. Also, if the tenants know they are working on something that is “theirs” they tend to buy better stuff and take pride in the upkeep. It is another win-win situation for all involved.

A common theme that you’ll hear throughout the Street Smart System is paperwork. By using the right paperwork, you can protect yourself from costly renovations, bad contractors, and unruly tenants. All of it is designed to help you make a profit on your properties and keep headaches at bay.

Are you ready to take all this information and turn your hobby into a business? It can be done and the next article will show you how.

Here’s to your success!

Lou Brown
The Street Smart Investor