How to Figure the Cost of Rehabbing a Property
First you need to figure out what the value of the house will be after you’re finished with the rehab. The correct term for this is “Market Value” or “After Repaired Value” (ARV). To help you determine the ARV of the home, ask for the help of a realtor or home appraiser. They are familiar with the area you’re looking for buy in and can be a valuable resource.
You’ll also need to figure out how much to offer on the property and still be able to make repairs and make a profit when it sells. It’s a pretty simple formula. After Repair Value (“ARV”) times 70% minus Repairs minus $5000 equals Maximum Allowable Purchase Price (note: the $5000 is the cost of borrowing money for your project).
You’ll also need to have a good idea up front on how long you think it will take to make the repairs. That time frame for repairs will be an important part in determining if this is a good investment property. Just remember, the longer it takes to repair, the more the costs will accrue in the form of utilities, taxes, insurance, mortgage payments, maintenance, etc.
Things to consider when calculating time and cost of repairs:
1. Cleaning up the outside and putting in landscaping.
2. Exterior brick, siding, paint. It’s vital that the exterior of the house is appealing.
3. Condition of roof. The price of replacing an entire roof can be costly.
4. Broken windows. Getting replacement glass can be costly on odd-sized windows.
5. Plumbing fixtures. Broken or leaky fixtures need to be replaced or repaired. Outdated fixtures should also be replaced if you want to get the most “bang for your buck”.
6. Sewer lines, especially on rural properties, can be a disaster area that a lot of new investors overlook.
7. Electric wiring, fixtures, outlets, light switches all need to be inspected for problems.
8. Interior paint. Do walls or ceilings need painted? Do walls have holes? Do ceilings need texture?
9. Interior repair such as doors, cabinets, mini blinds, etc.
10. Air conditioner and heating system. Do they need repairs?
11. Bathoom and kitchen. These two areas are usually the most expensive areas for repairs. Make sure the sinks, toilets, tubs, showers, cabinets, countertops, appliances, & floors are all clean and working properly. If not you will need to make the repairs. These two areas of the can make or break a deal.
12. Other structural repairs such as ceiling and flooring supports.
I put together an excel spreadsheet with the average cost for everything I might need to repair at a property, broken down room by room, and that quickly lets me calculate repair costs. I don’t have to repair every item every time, so I only calculate the columns that apply to my current project.
Don’t forget to put in a fudge factor of 5% for unforeseen expenses. The majority of the time, you will run into repairs that you didn’t account for up front.
It’s tempting to only do the bare minimum when it comes to making repairs and upgrades on your rehab properties. That’s acceptable if you’ve bought the property as a rental investment. On the other hand, if you bought it with the intent to rehab and flip quickly, you need to make your house look better than anything else on the market.
Experienced investors will tell you to spend money on the “extras” to enhance and upgrade the appearance of the house. Items that will increase your home’s ability to sell quickly include nice lighting fixtures in the dining room and staircases, gold knobs on all cabinets, mini-blinds on all the windows, ceiling fans in all the rooms, and gold fixtures for the vanities and kitchen sink.
This doesn’t really have anything to do with estimating costs, but it’s a good thing to keep in mind. In my opinion, you should always pick neutral colors for paint and carpet. Exterior colors should be in line with other homes in the neighborhood. Interior colors should be white or off white with semi gloss on all trimming, doors, and walls. Carpet colors should also be neutral, such as beige or gray. Honestly it doesn’t matter what colors you choose because the new home owner will usually want to redecorate with their own style. But by choosing neutral colors you will ensure that everyone’s furniture will match the colors you’ve picked out. So if the prospective buyer doesn’t want to have the added cost of repainting to match their furniture or other dÃ?©cor right away, they won’t have to if you’ve picked neutral colors.
Renovations and repairs are a huge chunk of where your money is spent in the rehabbing business, so being able to estimate those costs before you purchase a property will enable you to walk away from the closing table with confidence and a smile on your face.
