How to calculate the costs of rehabilitating a property? This is another question that real estate investors ask themselves very frequently. So I’ll do my best to answer them here so others can benefit from the answers.
Your rehab costs will depend on the size of a repair project and whether major repairs are needed. Another factor will be whether you plan to do the work yourself and build “equity capital” or hire a more expensive subcontractor or general contractor. If you’re half handy and have the basic hand tools that would be used around the house, you can probably do most of the work yourself and save thousands of dollars. In the past, I’ve even included a small discount factor of $2,000 to $3,000 in case you find something bigger after you break the project. You never know what else you might find when you knock down a wall or start ripping out kitchen cabinets. The fudge factor can sometimes save you on your winnings. And if you don’t have to, you’ll have a lot more markup built into the deal.
Always check with your local zoning and other laws to make sure you can do the job in question.
Now I admit it, carpet and roof replacement is not something that strikes again. For one thing, a roof is hard work, and as far as kicking rugs, that’s another skill I’ve learned that I don’t have. I was told by one of my tenants in the early 2000s that the rug had a little wrinkle in the middle of the floor, she wasn’t too worried because the coffee table covered it. She said that whoever you hired to lay the carpet, she didn’t suggest that she hire him again. I never had the heart to tell her that I was one of those who did it.
Some states require certain things to be done before a mortgage can be financed in that state. Always check with your local real estate attorney, closer, title company, or real estate agent for what might be needed. These inspections, tests, and results will need to be added to your overall rehab costs.
I will give you an example; In South Carolina and most southeastern states, you must pass a termite inspection prior to closing. Depending on how you obtained the property, you may not have had a conventional closing, meaning the home inspection was never done when you acquired the property. Because I got the property in a creative, unconventional way, I was the only one to do any kind of inspection, and I did it from the West Coast. But, after rehabbing the property and attempting to sell it to a future owner, trouble hits you in the face, no good if you’re not ready for it! In the early 2000s, I learned my lesson getting a $16,000 bill that had to be met before the property closed. To say the least, the entire deal was a loss.
I wrote a simple spreadsheet tool that I have been using since the late 1990’s to help estimate and list the items the property needs with ease. It can run on your computer and smartphone and you can edit it on the go. It lists just about every normal item you might need for a rehab project. You can fill in the square footage of the property room by room and the program will tell you how many gallons of paint are required and the cost of the paint. And even calculate the amount of ceiling paint required in a separate column. Of course, you’ll want to save money by buying the 5-gallon buckets instead of the 1-gallon buckets, so you’ll overestimate the price of the paint a bit. So be aware of that.
Walking around the property will usually tell you what is needed in terms of repairs. If you find a property that needs a lot more than just cleaning, cosmetics, painting, and patching, you may want to pass up the deal if you’re new to real estate investing.
In the next article I will address the closing costs and maintenance fees of a Real Estate investment.