It is true what they say: you need to spend money to make money — and nowhere does that concept reign more true than the almighty real estate construction cost. It is in spending money on proper construction projects, after all, that adds significant value to a subject property. What is the definition of a successful flip, after all, if not for one that you put a little bit of money into only to realize more on the backend? There’s no doubt about it; the real estate construction cost you incur in rehabbing a home is a necessary evil, but one that can really work in your favor if you mind due diligence.
It is worth noting, however, that not all real estate construction costs are created equal, nor will they estimate themselves. No, as a real estate investor, it’s up to you — and you alone — to not only identify the most important construction projects for a rehab, but it’s also your responsibility to estimate how much they will cost.
If you want to learn how to estimate real estate construction costs effectively, look no further. Continue reading to find out which costs you need to pay special considerations to, and how they factor into your overall exit strategy.
No two construction jobs are created equal, but there are projects that are — more or less — universal. In fact, below you will find a list of many of the most common construction costs you can expect to find, inside and out:
[ How much will this house cost to fix up?” Download this FREE Repair Estimator Worksheet and quickly determine your fix-up costs ]
Construction hard costs, as their name would lead you to believe, are costs incurred from physical construction, not excluding equipment. Otherwise known as “brick-and-mortar costs,” hard construction costs are most closely associated with the building’s structure, site and landscape. Perhaps even more specifically, however, hard construction costs are typically more tangible than their “soft” counterparts, and are therefore easier to estimate. For a better idea of some of the hard construction costs you could expect to see on a job site, here are some prominent examples:
Contradictory to the previously discussed hard construction costs, their “soft” counterparts are those costs that aren’t directly correlated to construction costs. In other words, soft construction costs are costs incurred from indirectly working on a subject property. Common soft construction costs include, but are not limited to:
It is worth noting, however, that soft costs don’t end once a project is complete, but rather extend beyond completion of a project. Building maintenance, insurance, security, and other fees incurred after the initial project has been completed are all considered soft construction costs.
Pinpointing the real estate construction cost you can expect to incur on your next project is no simple task, but it’s not impossible. Fortunately, the entire process can be broken down into five steps:
Understand Your Market: Mind due diligence and develop a better understanding of the market and the people you intend to sell the home to. That way, you will have an idea of which upgrades to include, and whether they should be high end, low end, or average. Remember, you can’t possibly know how much something will cost if you don’t know the exact item you intend to upgrade with.
Walkthrough The Property: This is where you will take the time to physically walk through the property and inspect every square inch. Take note of every detail; namely, what needs to be fixed, replaced or added.
Confirm Condition: Be sure to go through everything with a fine-toothed comb. Make sure lights work (or don’t), HVAC units do their job, and everything else is in working condition. Then, proceed to identify your end goal for each item on the list. Does it need to be upgraded, fixed or replaced?
Determine A Price: Here’s where things get tricky. At this point, you should have a list of everything you want to do to the house. From here, it’s as simple as assigning a value to each item on your list, but I digress. That’s easier said than done. You should have an idea of how nice you want each of your “fixes” to be. For instance, if you are rehabbing a home in a high-end neighborhood, you will most likely want to use high-end materials.
Account For Every Detail: Rehabbing a house is a complex process; there are a lot of moving parts. It’s entirely too easy to leave things off your to-do list, but try your best not to. That said, there are a number of miscellaneous real estate construction costs that need to be considered. For example, soft construction costs (like permits, taxes and insurance) are easy to overlook.
There’s no doubt that this list simplifies an extensive process, but it hits on some very important points, not the least of which includes due diligence. Estimating real estate construction costs is, after all, reliant on an acute attention to detail. You need to be able to envision what it is you want, see it, and execute your plan. To do so, follow the five steps outlined above.
Not unlike determining your actual real estate construction cost, identifying the amount of money it will cost per square foot can be intimidating. That said, the concept of identifying how much your construction costs will add up to per square foot is relatively simple. For starters, you first need to determine the total amount you anticipate spending on your rehab. Again, doing so requires an acute attention to detail and a mind for due diligence — there are a lot of costs, and you need to account for each and every one of them. Next, you simply identify the amount of usable living space the home as. When you have both numbers, divide the total cost you expect to spend on the rehab with the total number of square feet in the home; that should give you a good idea of how much the rehab will cost per square foot.