I have an infatuation with cheap guitars, and when I say that, I feel compelled to clarify that I'm not referring to the respectable kind of "affordable" electric guitar, like a PRS SE, a Mexican-made Fender Standard, or something similar. I'm talking about guitars that one might only encounter in the darkest, moldiest recesses of a pawn shop in the dangerous part of town, or something that your dad might have pulled out of a dumpster one night as he stumbled home drunk (again). Finding a misfit guitar like this, and rescuing it from the brink of oblivion, holds a special fascination for me that I can't quite explain. I'm a sucker for trash turned into treasure.
The best part about making junk guitars into players is that it costs hardly anything, and the stakes are really low, so even if you screw it up and end up with a pile of unplayable garbage, you haven't lost much, and you probably learned a valuable lesson or two that will inform your future endeavors in the field. The other best part is that, if you make smart decisions and the gods are on your side, then you will end up with a new (to you) guitar that cost very little money, and is probably pretty damned good, or maybe even spectacular.
Cash for clunkers
One can acquire a junk guitar for a project such as this in any number of ways. Finding one in the garbage is nice, and it does happen from time-to-time, but this scenario cannot be depended upon as a regular source. If you're known among friends and family as a guitar enthusiast, sometimes people will give you a crappy guitar they dug out of a basement, garage, or crawlspace. Most of the time, though, one must be more purposeful when embarking on a junk guitar rehab project. Pawn shops, music stores of ill repute, Craigslist, and Ebay are all good places to troll for a potential candidate.
When laying down some cash for a clunker, I like to keep the investment as minimal as possible. 100 dollars is my standard maximum investment. Within this price range, there are often a fair number of interesting possibilities. It's important to find something with "good bones," which basically means that it has a sturdily constructed body (made of real wood), and a straight neck with decent frets and a functioning truss rod. Common brands and models that are usually good bets include Fender Squire series guitars, pretty much anything Yamaha or Ibanez, Epiphones, Jacksons, and Schecters, among others. I try to stick with well known brands, if possible, as the quality is typically uniformly high even on their budget lines, and replacement parts are easy to find.
These days, it is entirely possible for one to scrounge up a sub-100-dollar guitar that is both playable and decent sounding, so before you go gutting the electronics and yanking the hardware, spend a minute or two playing the guitar and ascertaining its tonal qualities. Get some fresh strings on it, check the action and intonation, see how well it tunes up, and if it stays that way for very long.
Sometimes you'll come across a pawn shop prize that has good pickups, reliable hardware, and stays in tune, and maybe just needs a proper setup to be a functional and inspiring instrument. More often, though, these guitars will need more dramatic improvements to live up to their full potential, usually in the form of better pickups and electronics, and sturdier hardware. These days, there are a lot of options for acquiring quality guitar parts for very little cash.
Pickups and electronics
The most dramatic way to improve the sound of an electric guitar is by changing the pickups. There is simply no other single element that has as powerful an effect on the tone. So, if the tone sucks, start with the pickups. Fancy boutique pickups are nice, of course, but if you go that route you'll end up spending more on the pickups than you spent on the guitar. That's not at all in the spirit of what we're trying to do here. For sprucing up a junk guitar, second-hand pickups are an excellent choice. Lightly used pickups from Seymour Duncan, Dimarzio, Gibson, Fender, Bill Lawrence, and other major manufacturers can all be had pretty inexpensively on Ebay and elsewhere, and they're very common, so it's easy to get an accurate idea of what they sound like before installing them.
If you want a new set of pickups, there are many modern budget pickups that sound just as good (or really, really close to as good) as pickups from the big manufacturers. Companies like GFS offer a bewildering array of guitar transducers, from vintage-style Strat and Tele replacements, to firebreathing humbuckers, P-90's, gold foils, Filtertron styles, and many more. Other reputable sources include Mighty Mite and Carvin, both of which offer an array of great pickups that won't push a stressed budget over the edge. There are also companies like Tonerider, out of the U.K., that offer genuine boutique quality at prices that are less than a typical set of mass-manufactured pickups.
As long as pickups are being upgraded, it pays to swap out some of the other electronic parts as well. Cheap guitars are usually loaded with shoddy, no-name pots, jacks, and switches, so replacing these with sturdier models from CTS, Alpha, Switchcraft, or another high quality brand, can make a noticeable improvement in sound and function. This is a pretty cheap upgrade, as these parts can be had for just a few dollars a piece. Stewmac, Allparts, and GFS are excellent resources for guitar electronics.
Once the pickup situation is sorted out, the next round of improvements should focus on hardware, primarily bridges and bridge saddles. Cheap guitars are often equipped with equally cheap bridges, especially if the guitar in question is set up with a vibrato system of some sort. Cheap vibrato systems are almost uniformly horrible, and should be avoided. They can be replaced easily and inexpensively if they're of a standard Fender variety, but if they are of a more unusual make, finding a suitable replacement could be exceedingly difficult. In this case, either plan on blocking it to make the guitar into a hardtail, or get a different junk guitar. Shoddy vibratos are rarely worth the trouble.
If your junk guitar is already a hardtail, with a tune-o-matic style bridge or something similar, then it might be fine as-is. Many budget hardtail bridges are perfectly functional once the guitar is set up properly, but if yours is not, or you simply desire something more robust, then there are plenty of options available through the usual suppliers of guitar parts. For the finest in tune-o-matic replacements, I love the TonePros bridges. They are extremely well made, with tighter tolerances and improved intonation over vintage-style bridges, and they offer a noticeable sonic enhancement. TonePros are also reasonably priced new, and can be found used for even less.
Tuners are the next crucial element of the hardware equation. As with bridges, many modern sets of budget tuning machines, such as those one might find on a newer Yamaha Pacifica or Squire Strat, are pretty decent. Use good strings and wind them properly, and they will keep the guitar reliably in tune. Better tuners are available, though. Standard styles from well known brands like Grover, Fender, and Gotoh are dependable, affordable choices, and if you've got a little more cheese to spread around, the locking tuners from Schaller and Sperzel are superb, and will probably make your life a lot easier. These are more expensive new, but used sets are widely available on Ebay and elsewhere for a lot less dough.
Junk guitar to superstar
Transforming a junk guitar into a player is an excellent way for those of us who "jam econo", either by necessity or by choice, to expand our guitar collections without starving to death, drowning in credit card debt, or ending up divorced. It's also a great way to get a solid first electric guitar for a kid or a friend just starting out. Cheap instruments of very good quality abound these days, and well made aftermarket parts are easy to come by as well. If one resolves to acquire every part for the project second-hand, on Ebay, Craigslist, or elsewhere, a guitar rehabilitation like the kind I have descibed can be completed for next to nothing. Beyond these economic concerns, it's also extremely satisfying to see an instrument that was once destined for the trash heap return to life as a functional, and possibly even beautiful, tool for music creation.