How to calculate the costs of rehabilitation of a property? This is another question that real estate investors often ask themselves calmly. So I will do my best to answer them here so that others can benefit from the answers.
Rehabilitation costs will depend on the scale of the repair project and if there are any major repairs that need to be made. Another factor will be whether you plan to do the work yourself and create a “working equity” or tenant for a more expensive subcontractor or general contractor. If you have half its capacity and have the basic hand tools that would be used around the house, you can probably do most of the work yourself and save thousands of dollars. In the past, I have even added a small change factor of $ 2000 to $ 3000 in case you find something more important after starting the project. You never know what else you might find when you rip out a wall or start ripping out kitchen cabinets. The fudge factor can sometimes save you profits. And if you don’t have to, you will have a lot more profit margin built into the deal.
Always check with your local zoning and other laws to make sure you can get the job done.
Now I admit it, carpet and roof replacement is not something to strike again. For one thing, a roof is hard work, and when it comes to kicking rugs, that’s another skill I’ve learned that I don’t possess. One of my tenants in the early 2000s told me that the carpet had a small wrinkle in the middle of the floor, which she wasn’t too concerned about because the coffee table covered it. She said whoever hired to lay the carpet, did not suggest that they hire him again. I never had the heart to tell him that I was one of those who did.
Some states require certain things to be done before a mortgage can be financed in that state. Always check with your local real estate attorney, closer, title company, or real estate agent to find out what may be necessary. These inspections, tests, and results will need to be added to your overall rehab costs.
I will give you an example; In South Carolina and most southeastern states, you must pass a termite inspection before closing. Depending on how you obtained the property, you may not have had a conventional closing, which means that the home inspection was never done when you acquired the property. As I obtained the property in a creative, unconventional way, I was the only one to do some kind of inspection, and I did it from the west coast. But, after rehabbing the property and trying to sell it to a future owner, trouble hits you in the face – no good if you’re not ready for it! In the early 2000s, I learned my lesson a lot by getting a $ 16,000 bill that had to be satisfied before the property closed. To say the least, the whole deal was a waste.
I wrote a simple spreadsheet tool that I have been using since the late 1990s to make it easy to estimate and list the items the property needs. It can run on your computer and smartphone and you can edit it on the fly. It lists almost all the normal items you may need for a rehab project. You can fill in the square footage of the property room by room and the program will tell you how many gallons of paint are required and the cost of the paint. And even calculate the amount of ceiling paint needed in a separate column. Of course, you’ll want to save money by buying the 5-gallon pails instead of the gallon pails, so you’ll be slightly overestimating the price of the paint. So be aware of that.
Walking around the property will usually tell you what is needed in terms of repairs. If you find a property that needs a lot more than cleaning, cosmetics, painting, and patching, you may want to skip the deal if you’re new to the real estate investment field.
In the next article I will address the closing costs and maintenance fees of a real estate investment.