One of the hardest parts of leveling up your real estate investment skills is learning how to properly estimate rehab costs. Watching a seasoned investor look at a run-down properly and quickly cite a $75,000 renovation budget feels almost like a magic trick. They arrived at that number how? Do they have a secret computer in their brain? But it turns out that estimating rehab costs is actually simple—as long as you take time to learn the basics.
There are a few reasons why learning to quickly estimate rehab costs is so important for newbie investors. By understanding potential expenses, you can arrive at an accurate maximum allowable offer. No smart investment starts by paying too much! Begin each fix and flip or buy and hold purchase with rehab projections—before you buy. This ensures you won’t be underwater immediately after signing the closing papers.
Additionally, wholesalers with a strong understanding of the expected rehab costs can more accurately present the information to their cash buyer.
Keep in mind, this article will not be the end-all-be-all explanation of how to accurately estimate rehab costs. For that, you’ll want to get a copy of The Book on Estimating Rehab Costs: The Investor’s Guide to Defining Your Renovation Plan, Building Your Budget, and Knowing Exactly How Much It All Costs by expert real estate investor and flipper J Scott.
The Simple 6-Step Process to Estimating Rehab Costs
Here it is: the “magic” process that any experienced home flipper should follow. Estimating renovation projects accurately and quickly requires following these six steps. Our methodology is simple, and won’t take too much time. Before you know it, you’ll be all budgeted and ready for your own successful rehab projects.
1. Understand your buyer and the neighborhood
Before you start calculating rehab costs, understand what the final product will look like. Some high-end remodels take months—cosmetic renovations take just days. What level of finish are you (or your wholesale buyer) aiming for? A luxury kitchen, a simple IKEA set-up, or just a cabinet paint job? Do you need to add a master bathroom, or will your potential buyer or renter be satisfied with a new half-bath?
If you’re not sure, take a look around the neighborhood. Attend open houses, if any nearby properties are for sale. What’s the standard? Renovating either above or below the area’s standard can cost you big time.
In an inexpensive neighborhood, money spent on top-of-the-line finishes is wasted. Buyers won’t pay extra just because you put in luxe kitchen upgrades, like a six-burner stove. But in expensive neighborhoods, homes with below-market finishes will linger longer on the MLS.
Therefore, if the home is in a working-class neighborhood with mostly working-class rentals, you don’t need to spend hundreds of thousands on a rehab.
2. Tour the property thoroughly
Next, with a good understanding of how you want the finished product to look, walk through the property very slowly. Take a lot of photos or record a video on your phone so you can easily recall the condition later. Trust me, you won’t remember it all!
Look out for any big problems, like a roof in need of repair, cracked foundation, mold, HVAC issues, and termites. These rehab tasks can quickly destroy even the most detailed budget if not initially factored in. Plus, you can’t truly understand the renovation scope if you don’t know all the issues. So be detailed here—you won’t regret it.
If you’re buying directly from the seller or in a wholesaling situation, the seller might be home. Let them know you will be taking pictures, but they’re only for analysis. You won’t be making the photos public. Don’t make them feel like you are invading their privacy.
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