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I remember my first deal like it was yesterday, when my wife basically forced me to jump in and do it! That’s a story for another day, but I was most scared about figuring out rehab costs!
That’s because so much of the other steps are either you do it or you don’t. You find a deal or you don’t. You make an offer and it either does or doesn’t get accepted. You put together a contract or you don’t. They’re basically things you check off a list.
But when it comes to figuring out the rehab? It’s all an estimate. You’re putting in the research, but you still have to make some assumptions and hope the market stays with you.
Also, once you start the rehab work, there’s no going back…so if you find out halfway through that your numbers were off, you still have to keep going! It’s a bit scary.
With these tips I’m going to share, as well as some practice, you’ll understand how to calculate rehab (fix & flip) costs as well as anyone!
What is a Rehab Project
Alright, let’s start from the beginning. You’re looking for a way to make money, and you know that investing in real estate is perhaps the greatest wealth creation device in existence. It creates more millionaires than anything else.
And you’ve heard of a fix & flip, but how exactly does it work?
Put simply, you’re going to find a property with a discounted price. They’re usually discounted because the owner is motivated in one way or another.
For example, perhaps the property needs tons of repairs and the owner isn’t up to it. Or the owner dies, and the kids want to sell it so they can split their inheritance. Or they’re about to be foreclosed on, or go bankrupt. There are tons of reasons!
But the one thing in common is that these properties usually need repairs—if they didn’t, the owner would just list the property for full market value!
So you’re going to take this property, fix it up, and then sell it for a much higher price. The owner walks away with some cash in their pocket and a problem solved, and you get to make a nice profit for your efforts!
How much profit should you expect on a deal like this? I say that minimum you should look for 10% of the after repair value of the house. Typically, you’ll make more than that, but there’s too much risk and not enough reward to shoot for less than 10%. Our borrowers at Do Hard Money average $32,572 per paid-off deal. Not bad, right
Multiple Rounds of Rehab
Now, to dive into estimating rehab, I need to explain that it’s really a two-part process! At first glance, you might think you’re going to bring in a contractor right from the start and they’re going to give you a detailed estimate and you can move forward.
Not so! There are actually two rounds (minimum) of estimates you’re going to do!
First, you’re going to do a rough estimate—even though you know it won’t be exact, you’ll still need to ballpark it yourself.
If you’re new, then I need to explain that real estate investing is all a numbers game. You’re NOT going to get into this, spend weeks and weeks and weeks on one deal, getting all your ducks in a row, and expect to have instant success with this one deal.
Not at all!
The key to success that usually takes new investors a while to grasp is that you’re going to have make a ton of offers on houses. Like a TON. I tell people it can be 25-100 offers placed when you’re brand new before you’ll have a deal.
So don’t get sucked into this ONE property that looks like it might be a good deal. Odds are very low that the one property you found is going to turn into a flippable deal. It’s just not the way it works.
With that said, you need to develop processes that allow you to move around and look at tons of deals and place tons of offers!
In other words, no contractor is going to go with you to look at 50 properties and give you full estimates. It would be a massive waste of their time.
But here’s the good news…at this step, you’re just trying to figure out if you think it might be a good deal. Even if you mess up the rehab estimate on this step, you can still back out later once you’ve done the full estimate with your contractor.
Over the years, I’ve developed some good rules of thumb to help you with a quick & dirty rehab estimate:
Rental Quality Rehab Repairs
Typically with rentals, you want to do an extremely light rehab! In order to be profitable, you’re going to buy places that aren’t quite as rundown, and then you’re going to do as little work as possible in order to make the place decent.
Of course, you’re not going to try to have your place be a complete dump—you still want happy tenants willing to live there for years. But you’re also going to be less reluctant to change all the flooring, renovate the entire kitchen, and add an extra bathroom, if you know what I mean.
So, here’s how I estimate the rehab costs on a potential rental project:
Typically, for EVERY project, you’re going to be doing painting, replacing carpet, cleaning, and doing some landscaping to just kind of spruce up the place.
I recommend always doing these because they’re not terribly expensive, but can result in much higher returns. They’re the best bang-for-your-buck projects.
Many years ago, when I was considering moving into a rental, the entire basement had AWFUL carpeting. The family that had lived there previously had 5+ kids and they destroyed the place. One of the bedrooms looked like someone had been murdered in there—in reality, I think it was fruit punch or something…but still a bad look. It was the type of carpet you get in classrooms, you know the short, coarse stuff that is meant to be super cheap and barely functional.
We almost didn’t move into the place. We mentioned it to the owner, and he replaced the entire basement with much better carpeting and we had no problems moving in!
Of course I don’t advocate replacing the carpet in between each tenant, but if you’re trying to save money on your rehab, sticking with old, cruddy carpeting isn’t the place to do it.
For those changes, the cost per square foot are in the $6-$14 range. So if you’re going with a rough estimate, you’ll likely want to pick $10 and go with it. However, if you can tell a few more things need to be done besides those basic ones, maybe nudge your estimate towards $14. I rarely go with $6—you’re always better overestimating.
Light Rehab Repairs
So you walk through your potential deal for the first time and it doesn’t look like you’re going to need a ton of work. You’re still going to want to do a bit more than for a rental property, in all likelihood, so that you can match the comparable properties.
So you’ll want to do all the stuff I mentioned above in the rental rehab, along with a few other projects.
You’ll want to do some light stuff in the bathrooms and kitchens, but likely not fully remodeling those rooms. Add in higher quality landscaping and maybe replacing some hardwood floors, and you’re looking at $10-$18 per square foot. Easiest rule of thumb is to go with $14.
Medium Rehab Repairs
Now with the medium rehab, you’re going to do everything you did before, but now replacing doors and trim, along with full kitchen and bathroom remodels. This is probably the most common level of rehab, because a house needing a light rehab will often not sell for a huge discount.
Here, you’re looking at a price tag of $19-$33 per square foot. You get a bigger range because it’s a bigger scope of work, but you can always nudge up or down from the average of $26 depending if it’s closer to a light or a heavy rehab.
Heavy Rehab Repairs
Now we’re having some fun!
This is basically a full gut. You’ll likely replace the HVAC, electrical, plumbing, and the water heater, in addition to all the projects from a medium rehab.
You’re going to be spending anywhere from $26-$48 per square foot, or about $37 on average! So for a 1,000 square foot home, you’ll want to estimate a $37,000 rehab budget.
Remember, you’re just trying to get an estimate that’s good enough that you can start making offers…nothing more. Don’t worry if you think you’re off. The exact numbers will come later when you do your full walkthrough with a contractor.
Problems with Rough Estimate
Because it’s cheaper to order in bulk, and more expensive to pay for someone to come out and do a small project, those estimates can be a bit off with larger (more than 2,400 sq feet) or smaller (less than 850 sq feet) properties.
For smaller houses, adjust your budget upward slightly.
For larger homes, adjust your budget downward a bit.
Full Project Estimate – How to Line Item
When I first started in the fix & flip business, I used to get REALLY frustrated with my contractors! I had seen it all—contractors who nickel and dimed me, ones who changed things on the fly without permission, wouldn’t work on the project unless I bugged them, do shoddy work, and even sometimes abandon the job altogether!
But here’s the most common thing that happened, and one that really affected my ability to calculate and stick to a fix & flip rehab budget.
Back in the day, I used to have my contractor walk through the property and give me a single number for the entire project. Whatever number that they decided. Not knowing any better, I would just accept the number and say that it sounded good. At the time, I thought it would make things simpler for both of us.
After all, as long as it fit into my budget for making profit on the deal, I thought the number sounded great!
Until we’d get to the end of the rehab. They would tell me that it’s done and that I could come take a look. I’d go into the bathroom and there wouldn’t be a mirror! There wouldn’t be toilet paper holders! And other rooms would have other essentials missing.
Talk about frustrating! I’d go confront the contractor and tell them it wasn’t finished…and you know what they’d say?
“That wasn’t in the rehab estimate.”
Of course, I’m thinking that anyone with half a brain would have thought a mirror and a toilet paper holder would be in the rehab estimate! But here’s the thing….
I didn’t have it written down anywhere. It wasn’t in the contract. All I had was a number, and if he wants to tell me those things aren’t in the budget, then what am I supposed to do?
Before I knew it, they’d get another $1k, $2k, or even more out of me. That’s money that comes straight out of my profit at the end, not to mention the delays because I think the project’s done and it isn’t. On a project with thin margins, those extra costs can kill the whole thing! If I think I’m walking away with $12k, but then I end up walking away with $7k…all of a sudden the project probably wasn’t worth all the time and effort I put into it.
So I started bringing a tape recorder. We’d walk around and I’d instruct the contractor to point out every project that needs doing, and how much that specific project would cost! I’d basically make him put everything in a line item, and then I had him on my tape recorder as a back up.
Now, I still do the tape recorder, but I also bring a pencil and a form that has all the different projects that I might want to do on the house so nothing gets forgotten.
And then—and here’s the real secret sauce—I’m the one who puts together the proposal. All they have to do is sign it! I don’t know if you’ve worked with contractors before, but they’re usually not the type of people that get a smile on their face when they have to do paperwork. They’re usually more than happy to have you do their work for them. They’d rather be out swinging a hammer
So if you’re worried that they might get annoyed that you’re tape recording them and providing a lot of oversight, don’t be worried. Often, they’ll appreciate you. If they don’t like it, say sayonara!
And this way, you’ll get an extremely accurate fix & flip rehab cost estimate, and the ability to stay on budget moving forward. It’s a win/win for sure.
Stick to Your Rehab Budget
When it comes time to work on the actual rehab, there are plenty of things that can sink your budget! Some of them are completely in your control, and some are out of your control—and some you can do quite a bit to control.
Here’s my list of tips for how to stick to your rehab budget.
Offer an Incentive for Finishing Early
You’re going to notice that with a lot of these tips that you’re going to have to be assertive with handling your rehab and working with your contractor! Just remember this—you have a ton of money riding on the project being profitable for you, and that the contractor works for you, not the other way around. Of course you’re not going to be a jerk, but be present, ask questions, and don’t avoid a tough topic because you’re worried about feelings. All of that sounds obvious, but it’s harder for some people when they’re standing face-to-face with their contractor.
So, I absolutely love this strategy.
One of the biggest problems you’ll run into with contractors is finishing your project on time! Generally, they don’t really have an incentive to finish when they quoted you. They can easily say they ran into some snags and it’s going to go a few weeks longer.
What are you going to do? Tell them to stop working on it? Not likely.
But then your costs start to go up like crazy. Extension payments on the loan. Interest payments. Utility costs. Insurance. These are what we call holding costs, and they typically run you about $50 per day. If your contractor takes his sweet time and costs you a month, that’s going to be a minimum of $1,500. And with hard money loans, you might have to pay a hefty extension fee as well.
Also, that’s time where you could have had the project done, a check in your pocket, ready to work on your next deal. Instead, you’re expending mental energy worrying about the project as well as your time to stay on top of things. It’s a bad situation.
So here’s what I do:
I offer the contractor a bonus for finishing early…but also a penalty for finishing late. Typically I’ll give them $25 per day that they finish early and charge $50 per day they finish late! Contractors jump at this. They usually have a few projects going at a time, and they’re likely to rearrange priorities if it means a few extra hundred dollars in their pocket.
And yes, they’ll agree to this even with the $50 per day late fee because they’ll be confident they can earn the $25 per day. Like I said, this takes some courage to offer to your contractor, but it avoids SO many problems down the road!
Visit Once a Week
It’s time to be annoying! Okay, so don’t do this in an annoying way—you’re not checking up on the contractor, you’re just curious about how the project’s looking…right?
Well sort of. This is how you can easily make sure that projects are looking good as they’re being built, that the contractor hasn’t changed anything, and that the contractor is actually doing the work!
I’ve heard horror stories of investors showing up to their property after a few months, expecting a nearly complete project, only for it to be clear the contractor hasn’t even set foot there.
What do you do if you’re doing an out-of-state flip?
Easy—you either have to know someone nearby who can check in frequently, or do a video walkthrough with the contractor, making sure that he shows you every part of the project. Here at DHM, we have former general contractors that act as project managers for our borrowers. They check in via video frequently with the GC on the project. This keeps things smooth, on-time, and on-budget.
Here’s another easy trap to fall into that can ruin your rehab budget! No one wants to do a less-than-stellar job when it comes to building a house. I get it. Plus, a lot of borrowers I’ve worked with think they can fetch $10k-$20k more than their comps because they put in flooring that nicer than the neighbors.
Unfortunately, that’s just NOT how real estate works! Buyers will look at comps in the neighborhood, just like you, and they’ll gravitate towards lower prices. A floor that’s too nice for the area doesn’t command a premium.
However, I do like to upgrade ONE thing above the normal quality of the neighborhood, as long as it’s not too expensive. A good example is doing a quartz countertop. Not overly expensive, but can help you sell the property faster. Don’t expect to sell it for a premium though.
Be Involved in Picking Some Colors/Materials Right from the Start
Sort of like stopping by each week, you want your GC to know that you’re involved and you’re invested—a not-so-subtle way of showing that you’re checking up on the contractor.
Also, having a say in what the final product is going to look like is just kind of…fun, to be honest. If you’re someone who likes to design, then this step should be a no-brainer. But even if you have no idea what you’re doing when it comes to picking colors, just being there is an important signal to your GC.
Have Someone Experienced Help You With the First Deal or Two
I like this strategy a lot. Having someone with you can give you so much piece of mind that’s it worth it to try and find someone to help. You can even offer $100 or something because they’re helping you with a business transaction.
If you have a buddy or family member who is or was a GC, have them come with you. Or, even better, if you can work with someone who is an active real estate investor, then they’ll have plenty of experience working with GCs and will know what to do.
Honestly, it almost doesn’t matter what questions you’re asking, it’s more about showing your GC that you care what’s happening and that you’ll be keeping an eye on things.
However, I also want you to have the mindset that you can ask questions, even if you’re not the expert. In fact, it’s almost easier if you’re not, because you can play dumb and point out things you’re not sure about. “Sorry, I’m new to this, but why would you do that?” or “What’s the purpose of doing that part first.” “This shouldn’t take that long, right?”
Do a Final Walkthrough
This is ESSENTIAL. Make it clear from the very beginning that you require a walkthrough with the GC at the end of the rehab. If they’re scoffing at the idea, then dump them and find another GC.
To me, this should 100% be standard. While most contractors have no problems with it, I have some who’ve acted profoundly annoyed by the whole thing, like I should just take their word for it on a $40,000 project. Doesn’t make sense, right?
Be sure to ask questions. Look at every single nook and cranny. Don’t let them gloss over any part of the process
Calculating fix & flip rehab costs is one of the trickier, yet more important steps to the entire process!
Getting this step right (or as close as possible) means moving forward on your deal with confidence. If you’re having trouble estimating this step, then you’re going to struggle with your deals.
Hope this helps…and good luck with your fix & flip.