In the late 1980s in California, Steve Jordan was remodeling foreclosed houses for banks when he realized that instead of working for the banks, he could create a similar system for himself by purchasing, renovating, and renting houses. He shut down his remodeling company and started Rebuilding America, at one point owning 40 houses. When the real estate values in California became too high for investing, he relocated to Pensacola, Fla., where in three years he amassed 190 rental units.
Jordan honed his investment evaluation skills by remodeling almost 5,000 houses in less than 10 years for the banks. “It's like making McDonald's hamburgers,” he says. “They're not that tasty, but they are consistent — they all taste the same all over the world. I had been a high-end remodeler, so I had to shift my thinking on getting things done quickly and economically.” Jordan's criteria for purchasing properties are based on features that renters find attractive. Most of his houses in Pensacola are a 15-minute drive from downtown, a 15-minute drive to the airport, and within a mile of the beach. “Rebuilding America is the name of my company, but rebuilding a small part of Pensacola is who we really are. We know that market intimately,” he says. In addition, he notes, since he purchases houses within a small circumference, every house he renovates raises the value of his other houses.
He has five subcontracted crews and uses a systematic approach to renovation. “We only buy two types of light fixtures — one for the ceiling and one for the bath. We only buy one exterior paint color and five interior paint colors. We replace all the carpeting with 14-inch tile. We have to watch every penny because we have a large volume of inventory,” Jordan says.
Almost at the same time that John McCloskey started his Pittsburgh remodeling business, J. Francis Co., he began operating a real estate development company, J. Francis Restoration. He has run both for 20 years. The development company has 20 rental properties. “There is a wonderful synergy between the two companies. I buy houses that need to be renovated, stockpile construction materials we pull out of remodeling projects, and wait for downtime at the remodeling firm. Then I use the investment properties to keep our personnel busy,” he explains.
PRIVATE OWNERSHIP Jordan and McCloskey have gone beyond most remodelers' investments, which consist of purchasing a property to house their offices. Twenty years ago, Gary Deimler of Deimler & Sons Construction in Harrisburg, Pa., purchased a piece of land that had an existing building where he located the firm's office. He added apartments to supplement the cost of the office space. Five years ago, he built a new building on the property to house the office. He and his wife own the property and lease it back to Deimler & Sons, says his son Craig Deimler, who now manages the company.
The firm pays a rent that is slightly above the market rate, which provides a good income for the couple. “It allows them to receive income from the company without paying taxes on the income,” Craig says. “The company is basically paying for the mortgage and taxes, so when the property is paid off, it gives them passive income for their retirement years and passive income is not taxed at the same rate as active income.”
Financial consultant Steve Maltzman, president and founder of SMA Consulting in Redlands, Calif., says that most of his clients who own property purchase it in their name. The main advantage of this is asset protection for the company. “If the firm owns the property, should a customer sue the firm, they can go after the office building, which has a lot of equity,” Maltzman says. Remodelers should also treat the renovation of their office space as a job. “Set up a budget and create an estimate so you won't go over budget,” he says.
When Andy Wright first moved to Grass Valley, Calif., 20 years ago, before he started WrightBuilt, he worked for a real estate development firm that built speculation homes. After learning from the owners of that firm, Wright decided to invest his own money. He purchased a property and built a house that he sold, then purchased and renovated a house for himself. He also owned some other land, but did not have funding to build another house. “When you build a spec house, if you have to borrow money for the land, and then pay a real estate agent to market that property, you're giving up two-thirds of all your profit. And the small amount of money that is left, you do not receive until the end. The margins were not great. I decided I could do better as a professional remodeler,” Wright says.