The ability to estimate rehab costs isn’t just an important skill to hone, but rather a pivotal, career-changing tool that may elevate an investor’s career to an entirely new level. You see, it’s not simply a good idea to learn how to estimate rehab costs; it’s necessary—especially if you hope to realize a high degree of success as an investor.
If for nothing else, estimating rehab costs will serve as the foundation for every deal. There isn’t a single investor who couldn’t benefit from improving their ability to estimate rehab costs, which is why I have developed this easy-to-follow guide.
Estimating rehab costs may seem like an insurmountable task for anyone that has never taken on the challenge, and rightfully so: estimating home rehab costs coincides with a high degree of precision and volume.
Any house on any given day may require investors to inspect hundreds of individual details to ensure they have accounted for every potential cost. It is worth noting, however, that estimating rehab costs doesn’t need to be intimidating, nor does it need to be hard. While there are countless amenities that deserve an investor’s undivided attention, there are ways to manage the task at hand. Most notably, investors will find that creating a system to estimate costs that breaks down each process into easy-to-digest steps is a great place to start.
Instead of looking at the entire home and its hundreds of components, develop a system that accounts for anything and everything. That way, you’ll not only have a blueprint to follow, but also be less likely to skip anything important.
In fact, it’s entirely possible to break down the process of estimating costs into five simple steps:
Walk around the entire property, making sure not to miss a single square inch.
Take detailed notes of everything that may require your attention.
Identify and prioritize any costs deemed necessary to facilitate the impending deal.
Proceed to estimate the costs of each expense, including labor and time.
Leave room in the budget for mistakes and delays in the construction process.
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The first step of estimating rehab costs is to walk around the property. Upon visiting the property for the first time (once the deal has been closed), an investor’s walkthrough should serve one single purpose: to gather all of the information and necessary details to put together a scope of work that will be used to bid and hire contractors. In doing so, investors must address three simple tasks:
Take pictures of everything that will need improvement.
Take measurements of any rooms or areas that may need to be deconstructed and reframed.
Start forming an opinion on what may need to be done to the home in order to sell it to an end buyer.
At this time, investors will need to find and identify each task that needs to be completed. Thankfully, I have provided a list of all the areas you will want to pay special considerations to on your first walkthrough.
When conducting a walkthrough, investors will need to be incredibly thorough and leave no stone unturned. A proper walkthrough will require every aspect of the home to be placed under a microscope. At the very least, each item on the following list needs to be evaluated on its own merits:
Paint (Interior & Exterior)
Outdoor Amenities (Fences, Decks, Porches, Etc.)
Heating Ventilation & Air Conditioning (HVAC)
Cabinets & Countertops
Look at each item listed above and start to formulate your own opinions. Does it need to be repaired? Is it perfectly fine the way it is? Does it need to be altered or changed in anyway to sell the home at a later date? These questions, and many more just like them, will help investors categorize the problems they may or may not currently have on their hands. Remember, it’s rare for a rehab to require everything to be fixed or replaced, so you’ll need to be able to discern which items need your attention and which ones are perfectly fine leaving as is. For a better idea of what may require your attention, reference comparable properties. Looking at nearby homes should give you a better idea of what you’ll need to do in your own home.
Once you have walked around the property and identified each item that needs to be addressed, the next thing you’ll want to do is categorize each problem. Literally write down what needs to be fixed and what is perfectly fine to leave alone. The resulting task list will serve as your foundation moving forward, and finally allow you to start estimating rehab costs. However, instead of simply guessing prices and the cost of labor, it’s time you asked for a little help.
Immediately after you have identified the items that need to be fixed or replaced, enlist the services of a contractor and Realtor (or real estate agent). Qualified real estate agents and contractors play an integral role in estimating rehab costs. Contractors, for example, will account for a large portion of the impending expenses. Real estate agents, on the other hand, will be able to help identify the quality and types of changes that need to be made.
With the help of a real estate agent, start looking at comparable properties, which will identify the level of work that must be done on the subject property in order to bring it up to the standards of the local neighborhood. Their research should direct you on the degree in which upgrades are implemented. If the kitchen cabinets require your attention, for example, a qualified real estate agent should be able to identify what types of cabinets to install and the price range to stay within. Their input will help set the budget for the upcoming costs on just about every amenity. With their advice, you’ll know exactly what materials to get and how much they cost.
Only once you have determined which upgrades you are going to make and the materials you are going to use will you want to move onto the next step: hiring a contractor. This is where you will discuss labor costs and timetables (don’t forget, time is money in real estate investing). The longer it takes to rehab a home, the higher the holding costs are, which must be factored into the original rehab costs. Therefore, you’ll want to hire a competent contractor who knows what they are doing and can stick to a schedule.
Learning how to estimate rehab costs is an invaluable skill every investor must demonstrate a high level of competency in. However, even the best investors know that every real estate deal coincides with an inherent degree of risk, or at least the chance that something doesn’t go according to plan. That said, it’s important to pad even the most accurate budgets with a margin for error. Whether the error takes place on the monetary end or scheduling end, it’s important to at least acknowledge the fact that things rarely go according to plan.
Obviously, the more room you leave in the budget for price flections, the better your budget will look in the end, but the idea is to find the perfect balance. Too high, and the budget may actually eat into profit margins; too low and it may impede the completion of the project altogether. Therefore, most investors give themselves about a five to 10 percent window to account for errors.
Few skills are more valuable to today’s investors than the ability to estimate rehab costs. Real estate entrepreneurs with the capacity to both quickly and accurately estimate how much impending rehabs will cost exercise a huge advantage over the competition. That said, there isn’t a single investor who wouldn’t benefit from learning more about estimating rehab costs. The more they hone their estimation skills, the more likely they are to increase profit margins and realize success.