One of the ways many inexperienced investors go wrong is improperly estimating the cost of rehabbing investment property or over spending on the rehab. In this article I will tell you how I estimate rehab costs.
Before I get into the method I use I want to talk about a problem I frequently see with new investors which is over improving the property. What usually happens is that the investor wants to improve the property to be more like a home in which they would like to live. This is not uncommon and the result can be spending way too much money on things that will not increase the monthly rent. Remember, every penny spent that improves the property beyond what is typical for comparable rental properties is wasted.
Calculating rehab costs is not an art, it is a process. And, any process depends upon working with known factors with as few variables as possible. However, when you first start looking at rent houses, you might think that the repairs for each property will be totally different and a process will be very difficult to implement. Actually, it is not hard if you standardize.
I've owned over 30 rental properties and used the same basic carpeting, pad, faucets, toilets, etc. in every property. I recommend you do the same so you can develop reliable estimates. As an example: carpet. I found out where local builders were buying the light brown carpet they were using in all the new homes. Because all the builders were buying the same carpet, it was always in stock and, if I needed to re-carpet a single room later, I could buy just what I needed in the same color. So, I now had a reasonably constant price for carpet. Now for installation.
Once I had a good source for the carpet I got estimates from a few installers and, comparing their estimates, calculated an average price per square foot for installation. Note that you need a little common sense here because if you need a small space re-carpeted, your costs will be higher per SqFt than if you need 1,500 SqFt re-carpeted.
So, with the carpet costs and the installation costs reasonably well defined, you now have a reasonably good price per SqFt for installed carpet. For example, suppose you need a 1,500 SqFt rent house re-carpeted and 80% of the house is carpet and the calculated factor is (for example) $2/SqFt. The calculation would be as follows: 1,500 SqFt x 80% x $2/SqFt = $2,400. Where can you get into trouble are stairs, multiple small areas, etc. since these require more time to install. Factors are great but they do not replace common sense. You can determine similar factors for faucets, sinks, garage doors, interior/exterior doors, washers, dryers, all the elements you typically need to replace. You will change these over time since prices and conditions change. And, after each rehab, compare your estimated costs vs. your actual costs and see if you need to tweak any of the factors.
Let's work through an example. Suppose you walked a potential investment property and determined that the following repairs are needed:
The following is an example of a spread sheet that might be used. Note that the following are not the cost factors I use and, even if they were, you would need to determine costs that are right for your area.
Note that I added $500 for "misc". I always add a "fudge factor" to handle the unexpected.
Contact me if you are considering buying or selling Las Vegas real estate. You will be glad you did.
...Eric
Eric Fernwood
RE/MAX CENTRAL
8400 W. Sahara Ave
Las Vegas NV 89117
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