Estimating rehab costs correctly can be one of the most difficult -- and crucial aspects -- to successful property investing. If you estimate a fix and flip renovation project too low, you will lose out on your profit. If you estimate too high, another investor will scoop up the deal.
How do you estimate home repair costs when you don’t have a construction background? How do you calculate rehab projects to ensure you will make the profit you are looking for as a property investor?
Check out these 5 steps provided by a professional investor.
5 Steps to Confidently Estimate Home Rehab Costs as an Investor
Step 1: Before you look at an investment property, know your comparables.
Comparables, also known as comps, are recently sold properties in a neighborhood similar to your home in size, age of home, location and other amenities.
Know the quality of the kitchen, bathrooms, flooring, windows, etc., of comps before you make an estimate. “Before you walk in the door of a possible investment, have a good idea of what you would need to do to make the house competitive with your comps,” advises Jeff Johnson, director of lending at Catalyst Funding, Houston.
Step 2: Have an itemized rehab checklist in hand when you walk the property.
The best way to avoid missing an important cost is to have a checklist in hand you can make notes on as you walk through the home.
Various checklists exist, along with apps. Find one that works for the property investing and rehab projects you plan to do. Johnson says his team at Catalyst uses a checklist each time they estimate a home. While each home will have unique features and needs, it’s always good to have a basic template to ensure you evaluate the key areas of any fix and flip project.
Step 3: If you are not confident with an itemized checklist, look to a contractor.
Have the contractor walk the investment property with you. Ask him to bid the project and use that bid as your guide in estimating rehab costs.
Step 4: Begin your estimate based on square footage.
Don’t get bogged down by the details of every room, such as how many outlets and light switches are in each room when estimating a paint job. Estimate based on total square footage and then break down the individual rooms or projects that require extensive work to get a more precise estimate.
Step 5: For major mechanicals such as plumbing, electrical and air conditioning, estimate based on your confidence level.
For example, if you feel only 25% certain the plumbing may need repairs, include 25% of that costs in your rehab expense. If you are 75% certain the roof needs replaced, factor in 75% of those costs into your expense.
This assures you planned money for those costs. If you don’t need it, then you’re ahead. If you do need to make those repairs, you may be a little short. Over time as you invest in more and more properties, these costs will even out.
This is the best way to assure you cover those “possible," larger expenses. “If you never estimate rehab costs in ‘possible’ costs, you will certainly lose money,” Johnson says. “And if you always include the those ‘possible’ costs, you’ll be bidding high and losing opportunity.”
Finding the Best Rehab Real Estate For Sale
Instead of searching and negotiating deals with various homeowners and realtors, many property investors and rehabbers look to property wholesalers to get the best opportunities. Why?
It’s convenient, easy and effective,
Wholesalers are experts in finding the best deals. They handle all the contracting and marketing so you stay focused on rehab and flipping the property for a profit.
Get on as many wholesale lists as possible. Sign up via email. Attend networking events. The best way to accelerate your opportunities in property investing is to have as many opportunities in front of you as possible.
To get on the Catalyst Wholesale List, sign up here. Available properties will be delivered right to your email.
Check out as many opportunities as possible. Don’t immediately nix an investment property because it “appears” repair costs may be too expensive.
The No. 1 Repair Most Investors Avoid -- But Shouldn’t
Many property investors and homebuyers think home foundation problems mean walk away. This may not be the case. In fact, this may provide a better opportunity. You can get a great deal on the property as others are scared away.
To confidently estimate foundation work, have a structural engineer do a report on what work the foundation needs. Take the report to a foundation repair company and ask them for an estimate for the work named in the report.
Bringing in a foundation repair company first usually leads to a high estimate as they have incentive to give you an estimate for all possible work, and possibly even more, than the foundation may need at this time.
Quick tip: When estimating rehab costs, don’t forget to ask whether the interior flooring will be damaged during foundation work. If so, ensure you include this cost in your rehab estimate.
Estimating Rehab Costs: Getting a Home Rehab Loan
Be prepared to make an offer when opportunity strikes by being pre-approved for a hard money loan.
For home rehab projects, hard money lending or cash will likely be your only financing opportunities as conventional lenders simply won’t take the risk on a home in poor condition. Also, traditional loans take time to get. Hard money loans are designed to be fast and easy so you don’t miss an investment opportunity.
If you choose to use cash, this may be a route you end of regretting. It’s risky and what happens if you run out? By using hard money loans, you maintain leverage to make multiple deals. When it comes to real estate investing, the more deals you can make, the better it will be for your bottom line!
Find a hard money lender whose team includes investors themselves. This gives them expertise and the desire to help educate you on the best approaches and opportunities to take for your rehab projects.
The tips and pointers hard money lenders can provide are invaluable and can be the difference between failure and success. You miss out on this mentorship when you choose to use your own cash to fund everything, and conventional lenders typically don’t have the expertise to provide you tips on rehab costs and the many other facets of property investing.
Catalyst Funding is a hard money lender who can help build your real estate investment opportunities. With a background in fix and flip projects and other property investments, we can provide resources and guidance to help you through the entire process. We strive to be more than a lender! For more information, contact Catalyst Funding online or call us at (832) 648-3626.
Estimating Rehab Costs for Real Estate Investors | Catalyst Funding