Know Your Reno: Small vs. Extensive Rehabs

Acquiring and rehabbing properties can be the linchpin of profitable real estate investments. From increasing an individual property’s resale value and profit to allowing real estate investors to enter new markets and diversify their portfolios, the success and profitability of a fix and flip or BRRRR project often comes down to the rehab.

There’s a catch — not all rehab projects are created equal. Depending on several factors, like the location and type of property, a small renovation may be enough to turn the property around. Extensive rehab projects may require additional funding sources and take longer to complete and turn a profit.

When you know the differentiating factors between a small and extensive rehab, it’s easier to find the right type of real estate loans and funding available to help you meet your investment goals.

What you should know about small rehabs for investment properties

A smaller rehab typically involves relatively minor repairs, upgrades, and cosmetic improvements to increase a property’s value and attract buyers. A small rehab usually focuses on things like aesthetics, functionality, and general market appeal without extensive structural changes or modifications.

Small rehabs usually have lower overhead costs and shorter time frames than larger-scale renovations.

Some property types are more ideal for small and minor rehabs than others:

• Single-family homes
• Townhomes
• Duplexes
• Condos
• Apartments

Upgrades are more likely to focus on interior improvements, such as improving or modernizing fixtures, flooring, or painting to attract buyers or renters.

What’s included in a small rehab?

The scope of a small rehab project can vary depending on the property and your goals. Some of the most common minor improvements to a property you’ll make during a small rehab project include:

• Cosmetic updates: Replacing outdated fixtures and hardware, upgrading lighting, installing new flooring, or refreshing landscaping.
• Kitchen and bathroom renovations: Upgrading countertops, cabinets, appliances, and fixtures in kitchens and bathrooms which can significantly enhance a property’s overall appeal and value.
• Curb appeal improvements: Enhancing the property's exterior by adding new siding, improving the entryway, upgrading the landscaping, or replacing the front door can impress potential buyers or renters.
• Minor repairs: Fixing minor issues like plumbing leaks, electrical problems, or roof repairs can be part of a small rehab project to ensure the property is up to code.
• Surface-level renovations: Refinishing hardwood floors, replacing outdated carpeting, and adding fresh paint to walls are common surface-level renovations that can quickly update the property's appearance.

Characteristics of an extensive rehab

In contrast, an extensive or full-scale renovation involves significant structural modifications, comprehensive repairs, and substantial upgrades. Unlike small rehab projects, extensive rehabs typically encompass a broader scope of work and may involve something closer to gutting the property and rebuilding it from the ground up or making significant structural changes.

Some of the common characteristics of extensive rehab projects include:

Structural modifications

Structural changes can include removing or adding walls, expanding or reducing the square footage, altering the floor plan, or even changing the building's foundation.

System upgrades

Updating or replacing electrical, plumbing, heating, ventilation, and air conditioning (HVAC) systems are considered major rehabilitation projects.

Interior and exterior renovations

An extensive rehab typically involves comprehensive improvements to a property's interior and exterior. Inside, you’ll replace windows and doors, upgrade insulation, install new flooring, renovate kitchens and bathrooms, and update fixtures and appliances. Outside, you’ll be applying fresh paint, replacing siding or tuckpointing brick, adding or replacing fencing, upgrading driveways or sidewalks, adding or replacing gutters, and re-roofing the home.

Permits and inspections

Due to the work involved, extensive rehab projects often require the right permits. These permits ensure compliance with local and state building codes and regulations. Be prepared to find out that the project may involve multiple inspections at different stages to verify compliance and safety.

Longer timelines and higher costs

Extensive rehab projects generally require more time and financial resources than smaller renovations. The scope of work, complexity, and potential unforeseen issues contribute to longer project timelines and increased costs.

Extensive rehabs are needed when a property is severely distressed, outdated, or needs substantial repairs and upgrades.

Giving yourself time for planning, budgeting, and project management is the key to ensuring the success of an extensive rehab project.

Using a fix and flip loan to finance rehab costs

A fix and flip loan is a standard financing option for real estate investors to cover the costs of rehabbing properties. Fix and flip loans are short-term loans that cover the acquisition cost and renovation expenses for an investment property.

Here's how using a fix and flip loan to finance rehab costs typically works:

1. Loan application: Investors apply for a fix and flip loan from a hard money lender. The application process may involve providing information about the property value, current finances, the planned renovations, and your experience completing similar projects.
2. Property valuation: The lender evaluates the property's value, considering its current condition and the estimated after-repair value (ARV), as part of the loan’s approval. The ARV is an assessment of the property's estimated value after the renovations are completed. The loan amount will typically be based on a percentage of the ARV.
3. Loan approval and terms: Fix and flip loans most often have higher interest rates and shorter, more flexible terms than traditional real estate loans.
4. Rehab funding: Once you’re approved, the funds from the fix and flip loan can be used to cover the acquisition cost of the property and the rehab expenses, including materials, contractor fees, permits, and other associated costs.

Using a fix and flip loan allows you to leverage financing to acquire and rehab properties without tying up all of your own capital. Always consider the interest rates, fees, and repayment terms associated with any loan you choose, as they can impact the overall profitability of the investment.

Bottom line

Rehabbing properties can be a game-changer for real estate investors, but it's crucial to understand the differences between small and extensive rehabs. Small rehabs offer quick aesthetic upgrades and improvements, perfect for properties like single-family homes, townhomes, and condos. On the other hand, extensive rehabs involve structural modifications and comprehensive renovations, ideal for distressed properties needing a complete overhaul.

Finding the right financing is essential whether you're pursuing a minor or extensive rehab. That's where Kiavi comes in. As a leading lending partner, Kiavi offers fix and flip loans designed for the unique needs of real estate investors. With a simple application process, competitive terms, and industry expertise, Kiavi can help you unlock the full potential of your rehab projects.

Don't miss out on the opportunity to transform properties and maximize your investment returns — partner with Kiavi to confidently navigate the rehab landscape and take your real estate ventures to new heights. Price out a deal today and discover how our financing solutions can propel your rehab projects to success.