Estimating Rehab Costs

As a real estate investor, estimating rehab costs for an investment property is an essential part of the investment process. Accurate rehab estimates helps you determine whether a property is worth investing in and how much you should offer for it. If you’re off on these estimates, it can be detrimental to your investment and could turn a profitable investment into quick sand, sucking all your money and profit away! Let’s talk through the tips on estimating rehab costs to ensure your investment delivers the massive returns you want.

INSPECTION PROCESS

Before getting into the actual estimation process, it is important to conduct a thorough inspection of the property, if you have the opportunity. There are many times in the investment world where an inspection is not granted, and if that’s the case you need to consider increasing your contingency budget (we’ll get to this later).

An inspection of an investment property may include you as the investor doing a thorough walk-through of the property, taking photos and video, and making notes on the items you will need to update, rehab, or replace.

If you have the opportunity to get a third party inspection, then you’ll be able to hire a trained professional to examine the roof, foundation, plumbing, electrical system, and HVAC system. The inspector should also look for any signs of water damage or mold. Once you have completed your walk through and/or the inspection, create a checklist of all necessary repairs and upgrades.

GETTING QUOTES

When estimating rehab costs, it is important to get multiple quotes from licensed and insured contractors. This will give you a better idea of how much each repair or upgrade will cost. Be sure to compare quotes and negotiate with contractors to get the best possible price.

In many cases, you won’t have time to get multiple quotes from contractors before making an offer. To minimize your risk, spend time researching costs for specific projects in your areas, and make calls to various contractors explaining the type of work that is needed and providing the pictures and video you took through the walk through. Some tradesmen will be able to provide you a rough estimate to help plan your budget.

Once again, if you aren’t able to get quotes on the various items before your offer or closing date, consider increasing the contingency budget.

contingency budget

Once you have beginning estimates in place, it’s time to consider allocating a contingency budget. This is a percentage of the total rehab cost that you set aside for unexpected expenses. A good rule of thumb is to allocate 10% to 20% of the total rehab cost for contingencies. However, depending on what type of inspection and walk through were completed, and how many quotes you have received from contractors, you may want to allocate more. Use your best judgement based on what you know about the property so far.

When possible, ask a mentor or coach to review the total rehab budget and point out any areas where you may have it wrong.

Prioritize repairs

Not all repairs are created equal. Some repairs are necessary for the safety and structural integrity of the property, while others are cosmetic. Think critically when reviewing your list of repairs and upgrades, what is going to provide the most ROI? Prioritize repairs based on their importance. This will help you stay within your budget and ensure that the property is safe and habitable.

DIY projects

If you’re open to it, many repairs and upgrades can be done by the investor themselves, saving money on contractor fees. Painting is one example that most people can manage themselves and can save big $$. However, it is important to be realistic about your skills and abilities…if you’re going to do it, do it right. We’ve all seen the “Landlord Special”, don’t be that guy!! Only take on DIY projects that you are confident you can complete successfully.

It’s no secret that estimating rehab costs for an investment property is a crucial step in the real estate investment process. Don’t let the uncertainty of the process slow you down, if you need help on the process, you know where to find us!