7706 Robalo Road
For Before and After Pictures, please go to:
http://www.kodakgallery.com/I.jsp?c=8z5vi.81behy8z&x=0&y=-al6yvi
In the past few months, I've noticed a lot of interest from clients and friends regarding the remodeling and renovation of investment properties. Because of this interest, I've decided to document my latest remodel project on this web site.
Choosing the Property
There is an old real estate saying that you make your money when you buy the property, not when you sell it. It's crucial, in my opinion, to pay no more than 70% of what the property is worth. To do this, you must have a thorough knowledge of the market and consistently look at the inventory as it comes available. For example, I probably look at 600-1000 properties a year and only buy one. You don't have to take it to the extreme that I do but it is important that you know your local market very well.
There are many different types of real estate investment:
• Personal Residences
• Flips
• Rentals
• Land
I always tell my clients that before they start investing in any other type of real estate, they should make sure that their personal residence is a good investment. Personal residences have tax advantages that can't be matched by any other type of investment. If you live in your house for two out of the last five years, the profit from the sale of that house is TAX FREE! This is the best loophole in our tax code. Example: You buy your house for $100,000, do some basic renovation (usually floors and paint), live in it for two years and sell it for $150,000. That $50k you made on the house-you don't owe a dime in taxes on that. Compare that with an investment property where, at best, you would pay a 15% capital gains tax. The capital gains tax doesn't sound like much but on that $50k profit, it would take a big $7,500 chunk out of it. That would cover your house payment for an entire year.
Unlike your personal residence, the biggest disadvantage of flipping a property is the taxes you will pay. In most cases, you will pay taxes on whatever tax bracket you're in. So with the same example above, if you're in the 25% tax bracket, you would pay $12,500 in taxes on your $50,000 profit. This stinks but there are advantages to flips also. Mainly, it allows you take take your profit quickly and frees up capital for other projects. I know what you're thinking. Wouldn't it make sense to rent the property out for a year or two and pay the 15% cap gains tax instead of a 25% to 35% ordinary income tax? In my opinion, NO. Rentals do have their place but in my extensive experience, you can spend a lot of time and money fixing a house and in a lot of cases, the renters will manage to trash it in the year the live there. I've had investors who have to replace the carpet every year. This can kill your profit margin. I would rather take the hit on the taxes than deal with the headaches of having a renter.
But there are plenty of investors who do make a lot of money renting properties. The whole key is to have a great cash flow so you can afford to cover expenses that come up. Currently, in the Austin market, it's hard to generate this cash flow because property values have appreciated so much that they payment is usually more the you can get with rent. I don't want to steer you completely away from buying rentals; you just have to make sure that you get them at a good enough price that your payment is more than covered with rent.
Finally, there's land. The advantage of raw land is that it requires very little work. The disadvantage is the holding cost can be great considering that it's not generating any income. Property tax rates in this town are outrageous. If you by a $100,000 tract of land, you'll pay around $2500 in taxes on it. Remember, this doesn't include any loan you may have on the land. I think land is a good investment for someone with a lot of cash who wants to hold it in a long term investment. We all know areas around Austin that have skyrocketed in the last few years. Just like with the other investments, the key is to buy the right property. Also, if you can get an agricultural exemption (usually on rural properties), land is often a great buy because the property taxes are virtually non-existent.
So, now that you know all this, you mush be wondering why I choose the little house on Robalo Road. As I mentioned earlier, I look at a lot of properties, either for myself or my clients. On nice Sunday, I was scheduled to show a client some condos when this listing pulled up on the Multiple Listing Service. It caught my eye because I knew the neighborhood very well, since I had sold the house three doors down several years ago. The property was a great price and more importantly, it was a great price per square foot for the neighborhood. Price per foot is the main stat I look at when evaluating properties. It can quickly tell you if the house is priced well or too high.
Since this property was in my client’s price range, I urged her to look at it even though she was mainly interested in condos. When we went over there, she was shocked at the condition of the place. Since she was a first time homebuyer, I can't say that I blame her. The tenants kept it pitch dark, had tons of crap everywhere, and the place smelled like the humane society. I wondered how people could live like that. She decided it would be too much work for her so I asked her if it was ok if I made an offer.
When she said yes, I went straight to the office to write it up. Although the place was disgusting, I realized it wouldn't be nearly as bad without the tenants stuff there. It really didn't need much work but you couldn't tell by its appearance when it was occupied. Needless to say, my offer was contingent upon the tenants vacating the property.
So, here it is a month later. The tenants are out and I have closed on the place. The next step is...
Evaluating What Needs to be Done
This is often as difficult as finding the property. When doing flips, it's important to think purely in financial terms when deciding on items to improve or repair. Sure, those granite countertops may look great but chances are you won't get your money back on them in a $150,000 neighborhood. Try to pick items that will only increase the value of the house. (It goes without saying that safety and structural items should be done so you're not selling someone a money pit.)
In this case, I walked through the house and made a list of everything I would like to do. This wasn't an easy task. It took very little time to write the list but a lot of thought to narrow it down to what I actually wanted done. Here's the list:
• Install new dishwasher near sink
• Repair wood rot around garage door and left roof eave
• Install crown molding in living, breakfast & master bedroom
• Replace front door
• Replace door from garage to back yard
• Replace exterior door from rear patio to back yard
• R&R rear porch addition
• Remove stumps in rear
• Clean up landscaping
• Remove gutters
• Rip out all bad carpentry in house and garage
• Remove front storm door
• Install light in kitchen
• Remove second faucet on front porch
• Remove old sprinkler system
• Replace garage door
• Fix sheetrock
• Tile or hardwoods in living and kitchen
• New cabinet pulls
• New door handles
• New light fixtures
• Pressure wash entire house
• Paint exterior and interior including doors
• Paint/stain front and rear porch
After compiling the list, I spent a couple of hours making a detailed inventory of supplies I need to complete the remodel:
• Door Knobs-5 Locking and 2 Hall/Closet
• 40 Cabinet Knobs
• 42 Handles
• 5 Door Stops
• Lights for the four bedrooms, hall, baths, kitchen, garage, patio, exterior, and living room
• Bath Sink and counter
• Mirrors for the hall and master baths
• 2 Showerheads
• 24 wall plate cover
• Hall Bath Plumbing fixture
• Smoke Detectors
• Broken tile-2 edge, 1 corner
• 9 x 7 Garage Door
• 450 square feet of Hard Floors (tile or wood)
*This list is heavily abbreviated so it doesn't take up too much space.
Okay, so that's where I stand now. The next step is a long trip to Lowe's to price out all the supplies. I generally do two trips, the first is a scouting mission and the second is to buy the stuff. Why the scouting mission? A lot of times, it determines the work I'm going to do. For example, hardwoods in the living room would look great but if they run me $5 a foot just for materials, I'll probably choose tile. I'm hoping to have my materials selected (and maybe even purchased) by this weekend. Until next time...
The Lowe's Marathon
As I mentioned in the last post, I spend a lot of time at Lowe's and Home Depot looking for supplies. This remodel is no exception. I started with a preliminary trip to Lowe's just to make a list of stuff I need and to get prices on everything from doors to light fixtures. This preliminary trip lasted about two hours. Keep in mind, I didn't buy a thing. Lowe's probably had about 80% of what I needed but some of the items were pretty expensive.
A friend of mine told me to check out Habitat for Humanity's Restore. I went there hoping to find some unique items at bargain prices. For the most part, I was disappointed. Most of the stuff there is crammed onto the shelves dirty and incomplete. To find anything that will work for your particular need is really difficult and most of their prices are more than new materials. But if you look really hard, you can find some great bargains. In my case, I found a nice French door that would go from the garage to the yard replacing a hideous beaten up wood door. I also found some interior doors that would be replacements for the ones that looked like Mike Tyson and OJ Simpson had a run at them. These doors were dirt cheap but, all in all, I don't think it was worth the time it took to find them.
Ok, so I spent about 4 hours just scouting for materials. Once I had my comprehensive list, I went back to Lowe's and spent another 5 hours buying the stuff. FYI, I really do prefer Lowe's to Home Depot. More organized, cleaner, better service, not as busy, etc. I spent over $1000 on tile, doors, hardware, light fixtures, plumbing fixtures, lawn stuff and much more. It was exhausting. The worst part was probably spending my Friday night unloading all the stuff in the house. Five hundred feet of tile is heavy! Shopping for and getting the materials probably took me a week. Honestly, it could be done in a day but I procrastinated because I really hate shopping. Next, actual work begins...
My Old Hippy Carpenter
The first contractor I use on my remodels is my Old Hippy Carpenter (we'll call him OHC). In the past, OHC had done an excellent job for me by coming up with practical and cost effective solutions to complicated problems. For example, foundation guys usually want a fortune to replace a rotted beam under the house. OHC would go down there with a car jack and some day labor and replace it for $50.The bad thing about OHC is that you have to watch him. Otherwise, he'll work really slowly.
On this project, he worked for me for three days. In those three days, he replaced four doors, ran one electrical wire, replaced a little rotted wood and did some minor trim work. I noticed that he was working very slowly throughout the whole project. I kept trying to motivate him to work a little faster or harder. He insisted that he was getting a lot done. On the third day, he was there for about four hours (he works on an hourly rate). I showed up and asked him what he'd done. He told me that he didn't have to show me his work, that I should just trust him. I replied it wasn't a question of trust, I just needed to know what he'd accomplished in the four hours him and his helper were working there. When he couldn't point out anything, I had to fire him.I felt bad because we've been working together on project like this for close to ten year. But I knew he was being dishonest and that's something I didn't want to put up with.
So many times, I keep working with bad contractors, mechanics and even professionals simply because it's difficult to find someone else. A while back, I promised myself that I would stop patronizing people who give bad service. There are plenty of people out there who are willing to work very hard for a fair price. There is no need to continue supporting contractors who are dishonest or unethical.Unfortunately, after I fired OHC, the project was put on hold for a little bit due to personal reasons. I'm hoping to restart next week.
What's taking me so long?
This is, by far, the slowest remodeling project I've ever done. I had a LOT of distractions in 2004 that kept me from working on this house. Then, in 2005, I went to India for a month so not much work got done then. It is now April and I'm still working on the property.Let's talk about what we have done since the last posting. After firing my old hippy carpenter, I went into a lull for several months and didn't work on the property due to some personal stuff.
Around December, I finally had a little bit of time to work on it again. The first step was to find a new contractor to finish up the carpentry, sheetrock and minor electrical/plumbing. As I stated in the last blog, I decided I was no longer putting up with mediocre contractors. I interviewed about three different people before deciding to go with Wayne H. Wayne had been the first guy I had interviewed for this job. I wish I would have used him right off the bat. He was honest, dependable, did great work and pretty much walked on water. I can't say enough good things about this guy. He worked with his wife, "Di" and they were able to install the dishwasher, fix the sheetrock, rehab the back porch, fix the plumbing and just about anything else I asked of them. They did all this at a reasonable price with minimal supervision. Finally, a truly GREAT contractor.
While Wayne was working, I also went ahead and installed a new garage door. As you can see from the outside pictures, the old one had served it's time. I also had my lawn guy, Joe, work on straightening up the yard and removing all the dead trees. Once all this was done, I took another break for a month to go on a vacation to India.
When I got back, it was time to find a painter. Learning from my past mistakes, I decided to interview a bunch of people for the paint job. The bids ranged from $3500 all the way up to $9000. I went with Miguel V. He was one of the guys that gave me a low bid. He came highly recommended by Joe my lawn guy. Miguel took about three weeks to finish painting the house. Once again, he did a great job. He was honest, punctual and very thorough.
I've come to realize that often, the key to getting great contractors is interviewing a bunch of them. You can tell which ones are reliable and which ones don't really care about the job when you compare them side by side.So the hard stuff is done. Now it's time for the finish out. New appliances, light and plumbing fixtures, door knobs, cabinet pulls, carpet, landscaping etc. I usually do this stuff myself but have been delaying a little due to work commitments. Anyway, I'm hoping to knock out a large percentage of this stuff by the end of the week. We'll see how that goes.
I'm Finally Done!
For some idiotic reason, I decided to do the finish out myself. So, for the last month, I’ve been at the house installing light fixtures, putting up ceiling fans, replacing door and cabinet hardware, putting in new toilets, installing appliances etc. This last stage is crucial. So many times, people do a great job remodeling a place but then skimp on the fixtures and hardware. For the average consumer, this is the first thing they notice. You don’t have to spend a fortune on light fixtures, just be sure and go above apartment grade stuff.
Free Toilets!!! I was in the process of replacing the guts of my toilets when I realized they were old and crappy, literally. I remembered that the City of Austin gave new toilets to customers in an effort to encourage them to save water. I called the city and they told me all I had to do was go to their offices downtown, pick up a couple of vouchers for new toilets and take those vouchers to a local plumbing supply place to pick up my brand new FREE state of the art flapperless toilets. I followed the city’s instructions and had my new toilets installed by the end of the day. For more info on free toilets, go to:
http://www.ci.austin.tx.us/watercon/sftoilet.htm
It took me forever to put all this stuff in but now the house looks great! After finishing this stuff, I decided to clean the house prior to putting the carpet in. I didn’t want the carpet getting dirty after installation. Once I cleaned up, I got bids from several people on the carpet. I decided to go with Brian Dover with Impact floors. His quality, price and service were all excellent. Once again, the key was interviewing several people to find the right guy. After carpet, I put in the new stainless steel appliances.
Usually, I buy my appliances from Lowe’s but I found Conn’s to be cheaper this time. So I bought my stuff there. After the appliances were installed, I spent a few more days doing final paint touch up, clean up, putting away my tools, cleaning the garage, etc.
Now I had one final thing left, Landscaping! Landscaping adds more value to a property than just about anything else. In the past, I would just go to Lowe’s or HD and buy whatever plants they had that looked pretty and put them in. Most of the time, the plants would be dead in a couple of months. This time, I decided I really wanted to research the correct plants to put in there.I got a couple of guided from the City of Austin on native plants that don’t require a lot of water. These guides are EXCELLENT and available online at:
http://www.ci.austin.tx.us/growgreen/plantguide/searchplant.cfm
I took the list this guide suggested to several local nurseries before finally buying my plants at Barton Creek Nursery on Bee Caves. The local nurseries have a much better selection and much healthier plants than the big box retailers. Plus the advice they give you is excellent. It only cost about a dollar more a plant which is a small price to pay for the difference in quality. I put the landscaping in and it looks great.I’M DONE!!!I listed the house yesterday and so far the reaction has been extremely positive. Check out the before and after pictures at:
http://www.kodakgallery.com/I.jsp?c=8z5vi.81behy8z&x=0&y=-al6yvi
I am thrilled with the way this home turned out. It took a lot longer than I expected but it feels good to know that whoever buys it will be getting a really good house in an excellent neighborhood. After doing this for over ten years, it’s still so much fun to take something and make it beautiful again. A part of me wants the house to sell right away but another part of me is really going to miss working on it. Who knows, maybe I’ll decide to sell my little condo and move in…