The Fastest Way To Build A Six Or Even… Seven Figure Real Estate EMPIRE!
If there’s one thing that can keep a real estate investor from sleeping well at night, it’s while in the middle of a remodel of a property. Quite literally, there are a lot of moving parts. And there are several critical mistakes you’ll want to avoid–and to do that, you’ll want to hire people you can trust.
Today’s guest, Tom Kraeutler, is an expert on this very topic. He’s the host of The Money Pit, a nationally syndicated radio show about home improvement. He’s also one of the guys responsible for creating the licensing procedure for home inspectors in New Jersey, where over 7,000 inspectors have been trained and licensed based on his work.
In our conversation, Tom shares a ton of insider secrets on reducing and eliminating risks when it comes to remodeling, contractors, and everything in between. You’ll learn how to build the team you need, talk to people effectively, and stay on time and on budget. If you value your money and your sanity, this episode’s a must-listen.
Key Takeaways with Tom Kraeutler
- How to make sure you have the proper inspector to check out the guts and bones of your properties.
- Why you should hire a structural engineer if you’re doing a major renovation.
- The importance of doing a re-inspection after the work is done.
- How to handle contractor communication and change orders.
- Why Tom recommends bringing in a designer if you’re remodeling a building.
Tom Kraeutler Tweetables
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Click Here to Read the Transcript with Tom Kraeutler
Josh Cantwell: So, hey there. Welcome back to the show. This is Josh. I’m excited to be your host. And today, I’ve got a special guest with me. His name is Tom Kraeutler. Tom is the host of The Money Pit podcast, which is a nationally syndicated radio show around home improvement. And Tom is an absolutely phenomenal guest.
He’s actually one of the original kind of founding inspectors that created the inspection process and the licensing procedure for home inspectors in the state of New Jersey. They’ve trained and licensed over 7,000 inspectors using his criteria. And he is an expert at remodeling houses and buildings and apartments. And you’re going to love this because you’re going to hear some real insider secrets on how to make sure you reduce or eliminate contractor risks.
So, on the show today, we’re going to talk about, number one, how to make sure that you have the proper inspector to inspect the bones of your apartment buildings and your homes – the water, the water, the water, the HVAC, the boilers, the chillers, the windows, and roofs, that’s number one. Number two, we’re going to talk about why you should hire a structural engineer when you have a major renovation and how to take the spec, meaning the design from the engineer to help eliminate contractor risks, that’s number two. Number three, we’re going to talk about the importance of a re-inspection after the work is done. And number four, we’re going to talk about contractor communication and change orders. And finally, number five, the importance of a designer when you are remodeling buildings, whether it’s the common spaces, whether it’s a kitchen, whether it’s a bathroom. Hiring a designer, again, in order to eliminate contractor risks and stay on time and on budget.
For those of you that want to sleep well at night, you want to remodel your buildings, your properties, your single-family, your commercial buildings, you want to do it well, sleep well at night and stay on time and on budget, this is a fantastic interview with Tom Kraeutler from The Money Pit. Here we go.
Josh Cantwell: So, hey, Tom, listen, welcome to Accelerated Real Estate Investor. Thanks for joining me on the show today.
Tom Kraeutler: Hey, Josh, it’s great to be here.
Josh Cantwell: Listen, Tom’s got a super popular and exciting podcast of his own, so I want to make sure all of you guys know about that right away. It’s The Money Pit podcast. So, make sure you guys check that out. Tom shares all kinds of strategies and we’re going to talk about today. Tom is a long, long expert in not only home inspections, but remodeling. And we’re going to talk about what’s working in today’s market.
So, Tom, let’s start with today. So, if you were remodeling a house, your own house, an apartment complex, and thinking about doing remodeling projects today that fit the modern home and the modern apartment complex today, what are some things that you would be doing? What are some things that you think are at the top of the list that increase value, increase the value of residences or apartment buildings? And what are some things maybe that people think you increase value that are a big, giant waste of money? So, let’s talk about what’s popular and exciting and profitable in today’s market.
Tom Kraeutler: Well, first of all, you want to protect your investments. So, I think a good place to start is to evaluate the structure and mechanical systems. Now, hopefully, if you work with inspectors that advise you on your purchase, you have a pretty good sense as to where you are on that because let’s face it, you don’t want to put money into a place making you look fantastic, adding all sorts of value to the experience of living there if you don’t have good bonds. So, I want to start with that. Make sure you’ve kind of cleared that hurdle first.
If you’ve had a home inspection, if you’ve had an engineering inspection, is the foundation solid? Is it building watertight? Water, water, water, three most important things to remember with a house or a building. If it gets in, nothing’s good’s going to happen. And man, if it gets in an apartment complex, it can spread like wildfire. And by wildfire, I mean mold. That’s a big issue today.
So, I would make sure that I am zipped up structurally, and then mechanically, look, you’re going to face expenses. You’ve got a budget now to do improvements. So, let’s evaluate the mechanical systems. And if there are those that are going to need improvement, make sure that you’re budgeting for its estimated life when you think it’s going to fail, and your inspectors and your experts can tell you that, look, if you got water heaters that are all 10 years old, chances are the next two or three years, you’re going to be replacing them right and left. So, I would make sure that my mechanical and structural systems are in good shape. Now, if anything is on the brink of needing replacement, do it now during the remodeling, it’s better.
And so, now, you know you have a good property that maybe at this moment doesn’t look great from a decor standpoint, but it’s got great bones, it’s not going anywhere. So, once that sort of box has been checked, then I think you could move to looking at some of the decor issues and the value issues that people look for, like new kitchens, for example.
Now, that’s one that always gets me because every time I hear about somebody doing a kitchen, talking about dropping 50, 60, 70, 100 grand in a kitchen, look, I’m remodeling a house right now, built in the 1900s. I spent 800 bucks on the cabinets, all in. That’s it. Didn’t include the countertop, but I found cabinets that were durable that didn’t cost a whole lot of money and was going to be looking great in this new apartment. So, make sure that you’re looking at the things that people want, kitchens and baths.
And in terms of the decor, neutral rocks, I think there’s a great lesson to be learned from executive search companies that will do the relocation of executives. If you’re going to be moving across the country, a reload company comes in, they agree to buy your house. Man, as soon as your moving van clears the corner, they’re in there neutralizing the whole place. They’re taking out that precious wallpaper that you and your wife spent months picking out, and it’s gone. And it’s all going to be about tan carpets or beige carpets and off-white walls because when you have a buyer that’s going to walk in that place, a new renter, they want to imagine their stuff in that space. And if their decor isn’t aligned with yours, that’s going to take away from the value of the property.
So, neutralizing is really important. And then focusing on those areas that people really find value in, like kitchens, like baths, like closets, adding some organization to closets is something that people will remember about that place if you’re competing against others in your area. I think those are the sorts of things that I would focus on initially, Josh.
Josh Cantwell: Yeah, I love it. The style, if you get into specifics, and the colors and things, it was this whole wave of white and then gray, gray LVP, and granites that were white with gray and black, and then going the stainless route. Now, it seems like a lot of gold is coming back in and sort of the brown tones, and some of the butcher block countertops. We actually do butcher blocks in a lot of our apartments because it’s so affordable, actually. It gives people an upgraded feeling, like a piece of granite for about 20% of the cost of granite.
And so, the challenge is, is how do you remodel a building or remodel a place that if you’re remodeling a house to flip it, sell it for the next buyer, you’re just trying to appeal to that one buyer? You’re buying an apartment complex that you’re going to own for the next 5, 10, 15 years. That neutralization is unbelievably important because you got one crack at it. You got one crack at doing your CapEx budget, and spending could be half a million to $2, $3 million an upgrade on that building if you do something that’s just in style today. Well, guess what happened seven years from now? You’re coming out of pocket to do it all over again.
Tom Kraeutler That’s right.
Josh Cantwell: That’s critical.
Tom Kraeutler: Yeah.
Josh Cantwell: What are some things you can’t…
Tom Kraeutler: Staying muted, I think, is important. You’re right. you can’t go too loud on anything because loud may be popular right now, but man, it’s not going to last. So, you’re right, that neutral, it’s okay to bring some of those grays and those browns in and those tones in, but you got to stay neutral. So, again, people can imagine that place chaining themselves in their stuff. And also, it’s going to carry because, look, you don’t want to have individual color schemes for each apartment. You got to be able to maintain this in a reasonably efficient way.
Josh Cantwell: No doubt. Let’s go back to the first comment you made about good bones because, I think, especially for apartment buildings, that’s critical. You don’t get a big pop as far as rent jumps, but boilers, chillers, windows, we just dropped 400 windows into one of our complexes that had almost 1,400 windows. We actually had, we bought the windows from Lowe’s, just massive commercial costs, like bulk order. And we brought a separate installer in. But we’re not going to get any rent jump for that. We’re not going to get, like the residents expect windows that work, a decent rent for that but super important.
Now, boilers, same thing, they expect their apartment to heat. So, if you’re not an expert at this, what kind of advice, Tom, do you think our audience should know about hiring an expert? Listen, I mean, you’re one of almost like the founding fathers of the New Jersey Inspection System, like getting people licensed to become home inspectors. A lot of people don’t really know a lot about these mechanical things. It’s critical to get them right because the last thing you want is a $50,000 boiler going down. So, what kind of things do our people need to know who are basically novice investors about some of these inspections and how to hire a good inspector to kind of do those kind of things for them?
Tom Kraeutler: Sure. So, a couple of things come to mind. So, first of all, the foundation of a good home inspector is his independence or her independence. So, there’s no conflict of interest. The problem with a lot of folks that are inexperienced in investing is they turn to the contractor for advice. Well, the contractor, I mean, you may be a great contractor, but contractors have conflicts of interest, and they don’t always also have the expertise that you need. I think they naturally try to stretch what services they can offer.
But a couple of things come to mind. So, let’s talk about that foundation example I gave you earlier. I get calls from people all the time that discover what I consider to be significant foundation issues. Now, look, all foundations have cracks and movement, and cracks in walls now pops. That’s not what we’re talking about here.
But if you had a horizontal crack in foundation wall because you had a lousy drainage over the last 10, 20 winters, the wall just started to bend and bend and bend to the point where it’s got a big crack in it. So, what do you do about that? Well, those folks would call contractors. Contractors would come in with all sorts of ideas on how to fix it. That is not the way to go.
If you’ve got a big structural issue like that, you want to go to an engineer, a structural engineer, and here’s why. First of all, you have the independence. Secondly, the engineer is going to specify for you exactly what’s going on and how to fix it. And he’ll actually specify step by step what’s going to be required, steps, materials, etc. That spec is critical. You take that spec.
Now, you go to contractors and you can go to several contractors. Look, I know you have your experience. Here’s how I want this to be repaired. It’s going to be consistent with what the engineer specified. Then the contractor accepts the job. You know that all the contractors, by the way, are bidding apples to apples because you didn’t give them a choice. You said this is how it has to be done.
And then once that contractor is done, there’s another important step, and that is you had the engineer come back and reinspect and certify that that repair was done right. So, now, what have we done? We’ve created a pedigree. We took a major issue in the building structurally, and we have evaluated professionally. It’s been repaired consistently with the professional’s advice. That’s been confirmed. And now, you know if any question comes up in the future as to, hey, why is this wall repaired? You can explain that background. And like I say, it’s like a pedigree that it was done right.
So, I think that’s really important to just be mindful of the contractor’s advice. It’s always better to have independent design advice. Independent advice from a home inspector is similar to that. Now, a home inspector is designed to be a generalist. They’re not going to get into areas that you can’t see. For example, we’re not going to do any kind of invasive inspection. But that said, those trained eyeballs on that property over a two or three or four-hour period that takes you that inspection can reveal a host of information that’s really valuable. Not only can they pinpoint defects that are present, they can give you a heads up on maybe life expectancy.
Very often, I’ll see a roof when I was doing home inspections. I would explain to the client, look, it’s not leaking now, it’s not showing cracks, but I’ve seen early signs of some mineral loss, some things that tell me that, look, this is going to be probably a big expense for you in the next five years. And I just want you to know about that because now you know what you’re up against, right?
Josh Cantwell: Right.
Tom Kraeutler: That kind of information. And then discovering the defects. There’s been a number of times in my career when I walked into the front door of the house, one of the things I inspected was a furnace. I’ve found a crack heat exchanger, very dangerous, and literally seen a new furnace roll in before I’m done with my inspection. It was that bad.
So, there’s a lot of value you can get from that advice, and that’s going to be different than what you get from a contractor. The contractor that comes in and he wants to do your kitchen. Every contractor comes in, like, well, we’re going to do these cabins, we’re going to do these faucets. That’s great. That sounds good.
Now, the guy comes in, he’s got another whole idea. Well, how are you possibly going to compare and contrast those opportunities? How do you do that? How do you know if you’re getting a good price or a bad price? Well, if you have a spec first, I think that’s important. And if it’s a kitchen, go to a kitchen designer. It’s worth the money to basically lay out what this place is going to look like when you’re done, and what materials, what brand of faucet, what kinds of appliances, all those things impact the budget, right? If you have this figured out ahead of time, you’re going to be way far ahead of this project and you’re really going to get a project that delivers value that’s finished on time and on budget without surprises.
Josh Cantwell: God. I love it. And Tom, I love it because you’re making me feel so good about some of the stuff that we do. We just bought a $16.3 million apartment complex, 300 units. We had a boiler inspector come in. We had a roof inspector come in. We had a structural engineer come in. And so, when we looked at the boilers, it wasn’t a contractor telling us that out of the 18 boilers, four of them needed to be replaced.
It was an engineer and a boiler kind of inspector expert that said four of these are got to go because this is a fire hazard in the next 6 to 12 months. These have to go and these other ones have X amount of life left in them. And so, we got that done during our due diligence process.
Same thing with the roofs, same thing with the windows, who guys came in and said, hey, we’ve got all these new windows that have been installed. They call them the Prince windows. It’s like Prince who sings that song, 1999. So, the Prince windows, we call them. And they were like the silver ones. And a lot of them had cracked seals and they had to go.
But we originally budget, we thought we’re going to have to replace 800 windows. We ended up doing 400 because a number of them, although they were a little older, the seals were good, they were in good shape, they did not need to be replaced. And they said, look, these have another 10 years of life expectancy, no reason to spend the money on the other 400. So, that’s a lot, saved us almost $350,000.
Tom Kraeutler: And it gave you all that knowledge because now, you can have basically a reserve analysis. You basically have reserve analysis. Now, you know in what year you’re going to need a budget to replace the rest of those windows or replace the rest of the other boiler. So, now, you have information that’s really valuable as you’re owning and managing that building because you know where you’re going.
Josh Cantwell: Right. Yeah, it allows me to sleep well at night. Exactly. And you mention was about design kind of comparing contracts in the designer to the inspector. The designer, same thing, like we just hired a designer and she came in with all kinds. This was specifically for exterior paint, rebranding, landscaping, signage. If a contractor comes in, we would have got 10 different prices for different types of signs. We would have got all different quotes for paint. We would have got all different kind of landscapers with different ideas on how it should be landscaped. And I would never be comparing apples to apples, right?
Tom Kraeutler: Yes.
Josh Cantwell: Now, we have a design. We have an FF&E sheet with a legend that says this is a specific paint, this is a specific color, this is worth to go. Now, the contractor can come back and say, okay, well, how many gallons and gallons and gallons of paint do I need? And because we go buy a lot of our own material, now, we just know we’re really just paying for labor. Now, we really will know this thing down to saying, we know what we want, we know what color it is. We can go to Lowe’s, we can go to Home Depot, we can go to our commercial accounts and our reps and say, hey, how much is this going to cost? Compare them ourselves.
And now, the contractor is going to come in and say, look, I got all the material. Only the labor. Can you do the job? Show me your experience. It’s all, Tom, I think, but this is making me think about sleeping well at night, right?
Tom Kraeutler: Yeah. No surprises.
Josh Cantwell: Whether it’s $3,000 house that you’re doing or a $3 million or a $30 million apartment, we all want to sleep well at night knowing that we’re not wasting money, we’re not overspending, and we don’t have these issues that are going to pop up out of nowhere. So, the advice that Tom gives us, the inspector designer, sleep well at night. That’s what I’m taking on.
Tom Kraeutler: Exactly. Yeah, absolutely. You do sleep well at night and you can plan financially what your future is in this property. So, you know what your income is, you know what your cost of money is, and now you know what the cost of those improvements is likely to be over the next decade or so.
Josh Cantwell: I love it. Tom, what are some improvements that you’ve seen people make that that have almost no ROI, that really don’t, like really help the value of the building or selling a property or improving an apartment? Is there anything that stands out that you think are mistakes that investors are making?
Tom Kraeutler: Well, one that comes to mind are pools. In some parts of the country, people expect to have pools, and that’s generally the south. In the north, it’s always interesting to me that in all those years I spent home inspecting, you’d have people that would come in as a buyer and go, oh, great, it has a pool. And just as many come in, oh, no, it’s got a pool because they’re worried about the safety of the pool, they’re worried about the maintenance of their pool. Maybe they’ve got little kids, all of those and some reasons. I’ve had just as many people ask me how to close the pool, how to fill in a pool, as what to do with it. So, just be really wary of those types of improvements before you jump into them.
And the other thing, and I don’t think we see this much with professionals, but you see this a lot with homes. Design ideas, their choice in wallpaper or carpet or floor covering at some point in time was just awful. You can’t imagine looking at a room that’s got yellow plaid wallpaper and you’re sickened. Somebody at some time in the history of this building was sitting and was standing in a wallpaper store going, hey, I like the yellow plaid. Let’s get that. Oh, my God. So, those sorts of things.
Look, there’s improvements like that that you can do that I kind of feel like they come out of the vacation budget. Hey, you take a vacation. You have a great time. Doesn’t have much resale value, but you had a good time. So, if you’re going to enjoy it while you’re there, go ahead and do it. If you want a hot tub in your basement, go ahead, put your hot tub in your basement. Don’t expect to say, hey, I have a hot tub in my basement, so I want an extra $10,000 for this house because it’s just not going to happen.
Josh Cantwell: Yeah. Got it. Love it, Tom. Listen, I wanted to ask you specifically about your show. This is one of the most popular home improvement shows and podcasts. And I wanted to ask you, as we kind of round third here and head for home, as our subscribers listen and engage in your show, what kind of things are they going to learn? What kind of things are you going to tell them on your show? Why should they listen to your show? Because home improvement, listen, I see this all the time with my audience, whether it’s an apartment improvement, a house improvement, the biggest risk as an investor, contractor risks, it’s doing these improvements the right way on time, on budget, and having a finished product that the consumer, whether it’s a buyer or a renter, the consumer is going to want.
Every time I’ve lost money on a property, it’s always been because the contractor, either one over budget, one over time, or there was some amenity that we were trying to add that did not work or it rolled that up to me, it’s contractor risks. So, we can almost say that as much as possible, I think we could be better investors. And I know you talk about that on your show.
Tom Kraeutler: Yeah. So, let me address the contractor risk and I’ll tell you about the show next. So, I think one of the things is always challenging in this industry, in the relationship between contractor and client is communication. Contractors are not naturally great communicators in a lot of respects. I mean, let’s face it, there’s a lot of guys that come into the business and maybe they started working for somebody.
But swinging a hammer is not the same as running a business of hammer swingers. It’s a different skill set. Think about that. You could be the greatest contractor in the world. But if you can’t run a contracting business, and I mean, manage the money, manage the men, manage the relationship with the client, you’re going to fail. Then consumers also are not experienced as contractor buyers, so to speak. They’re not doing these types of things every day.
So, where does it go wrong? I mean, one example is, the consumer sees you put the hole in the wall and goes, ah, I really think that that window is too small. Can we do this? Sure. You start doing this thinking, okay, well, I got a bigger header, I got to buy windows. And you’re sort of adding it up, but you don’t tell the consumer. Very clearly, yes, it’s going to add $10,000, $20,000, whatever it is, to the cost of the job. And too many people fail to change orders. Those are so important.
And of course, [inaudible 00:22:41] change order. It’s a big change order. It’s basically an addendum to your contract and it says, we agreed to do X, we’re making this change, and that’s going to result in a credit or a debit against that value. And this way, with the end of the job, there are no surprises on what’s owed to you as the contractor and what the consumer has to add on over to above what they’ve agreed to. So, I think that communication piece, it can’t be understated, Josh. It’s critical.
In terms of my show. Thanks for asking. So, we’ve been doing The Money Pit Home Improvement radio show. It’s syndicated on 400 stations around the nation as well as the podcast now. We’ve been doing the show since 1999, started off on a dozen stations in Boston area, small syndicate and just grew it. I spent about 20 years as a home inspector, overlapped some of those years doing radio. I was happy to get out of the crawl spaces and out of the 120-degree attics on the weekends and then just kind of let grew into what we do today.
So, having that background along with my co-host Leslie Segrete, we can handle just about any question that a pro or a consumer is going to have about a house, and if we don’t know, we’ll tell you that. But we have a 24/7 phone line, 888 MONEY PIT, and people call that all the time. They actually leave us questions to answer on the show or they’ll call in during the live broadcast. And we do Q&A. So, we do Q&A, and then every show, we do maybe three editorial topics of things that we think are interesting that are going to be coming up or current to the time of the show is going to air.
And so, if you listen to the show, we hope you’ll be informed, you’ll be entertained, you’ll be inspired, you’ll get some ideas on projects that you want to do yourself, maybe recommend to your clients. And you’ll have a little fun along the way. That’s it all about.
Josh Cantwell: Listen, this is a great, great piece of advice. Fast-hitting, hard-hitting show, fast-hitting, hard-hitting advice, so many things I took notes on Tom, so I appreciate you making time for us today at Accelerated Investor. Thanks for being here.
Tom Kraeutler: You got it.
Josh Cantwell: Well, there you go. I hope you enjoyed that interview with Tom, the MoneyPit.com/podcast is his show. If you want to reach out to him, again, MoneyPit.com for all your home improvement needs, ideas, to listen to the show, to get better ideas of how to use the spaces, the renovations, the dollars. Check out Tom’s website.
Also, if you are looking to consistently invest in apartment buildings and you want to be an owner/operator and do it yourself for your own account, but you’re looking to partner, joint venture, have a little bit of coaching and mentoring, join me at JoshCantwellCoaching.com, there you can apply to be one of our mastermind members.
And if you are an investor and you’re not looking to be an operator, but you want to invest in multifamily apartments and you just want to kind of set it and forget it, you want to write the check and get a great rate of return and invest in apartments without being the operator and be passive, go to FreelandVentures.com/passive to see more of our investment opportunities. We’ll see you next time. Take care.