A brief outline
For real estate investors looking for a property to fix and flip, being able to estimate the rehab costs is a valuable tool. It’s one of the best ways to help with the decision about whether a property is worth investing in, or if it’s unlikely to result in a high profit. Read on to find out how to estimate rehab costs.
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One of the most important parts of being a fix and flip real estate investor is being able to get a good idea of your rehab costs. Once you know how to estimate rehab costs, you’re well on your way to being able to spot a good investment property quickly. You can look at each property and gauge whether they will be worth investing in, by working out how much you’ll spend on buying and rehabbing the house. If you’re not sure how to estimate rehab costs yet, read on to learn about some of the most common methods.
Quick Methods for Estimating Rehab Costs
The most accurate way to estimate rehab costs would be to go through the entire project, make a list of everything that needs to be done and then work out the cost of it all. However, this can be tedious to do for every single project, so there are 3 short techniques that are often used instead.
Lump Sum Method
The lump sum method is a ballpark estimate and probably the least accurate way to work out your rehab costs. This should be used simply for a general idea of costs, often at the very beginning of your walk-through of a potential investment property. The lump sum method usually entails making a ballpark guess on how much renovations will cost by looking at what needs to be done and comparing it to projects that you’ve done before and totaling the amount.
For example, if you’ve flipped a house before that needed a bathroom remodel, new flooring and updating of fixtures, you could work out these costs and use any knowledge you may have on other costs when estimating the rehab costs on a new investment property. This is a very rough estimate and to be taken as such, because the rehab project can often cost much more. It is also not a method that inexperienced investors should use.
Cost Per Square Foot Method
This method involves taking the average cost per square foot for the renovations that are required and multiplying this by the square footage of the entire building. The best use case for this method is for determining whether an investment property is worth looking into or not. The reason is because it’s a rough estimate that doesn’t take the full scope of work into consideration in detail.
Room Estimation Method
This method is a mixture of the two methods above, as it involves estimating the costs of each room by doing a walk-through and comparing to projects you’ve done before, however it’s done on a room-by-room basis and tallied up at the end. Keep in mind that projects are often quoted by the size of the house and not the room necessarily. So, you’ll need to remember that when using this estimate.
For example, if the bedrooms needed some new fixtures which could be around $2,000 and the bathrooms needed minor remodels which could cost around $10,000, and the kitchen needed a cosmetic facelift at around $8,000 then, by the Room Estimation Method, the total rehab would cost about $20,000.
The Most Important Rooms to Analyze Carefully
When you’re looking at a house to see which rooms would need improving, you’ll need to pay close attention to certain details. These will be a good indication of what rehab projects you’ll need to do, so you can quickly work out a ballpark amount for the rehab.
Renovations that increase a home’s value the most are typically centered around the kitchen and the bathrooms. While you’ll need to analyze all areas of the house, these rooms are particularly important spaces to analyze when you’re working out what your rehab costs might be.
Kitchens
When you’re analyzing a kitchen, pay close attention to the cupboards, appliances, and paint. These are some of the most noticeable features and often these will need an upgrade to increase the home’s value. While more noticeable, these are also the cheaper ways to spruce up a kitchen without needing a full remodel. However, pay attention to the rest of the kitchen as well in case it’s in need of more upgrades.
Bathrooms
The other rooms that can often use an upgrade are the bathrooms. A minor bathroom remodel will be needed if the bathroom needs repainting, updating of fixtures and other small improvements. Check that the bathroom taps are working, and that the toilet, shower and bath are all in working order, or whether they’ll need replacing.
Bedrooms
When you’re checking out the bedrooms, make sure that there are enough bedrooms in the house, or whether there are ways to increase the size of the bedrooms. Sometimes bedrooms need a major upgrade, other times they only need smaller improvements. However, bedrooms can be a noticeable place to rehab.
Outdoor areas
Sometimes people forget to spend much attention on the outdoor areas, but these can be a good place to add value to a house. The addition of a wooden deck can result in an 80-85% recoup on costs, which makes this one of the best home improvements. So, check out the outdoor areas and see what can be improved or where you can add value.
Expensive Repairs & Renovations
- Major kitchen remodel: While kitchen remodels can offer the best ROI, they can also be very costly. A major kitchen remodel can cost around $50,000, depending on the appliances, countertops, and other materials you choose. If plumbing and electrical work has to be done, this can add onto the price in a big way.
- Major bathroom renovation: Bathroom renovations are another good investment when it comes to value for money, but they can quickly add up. Showers, baths and flooring can be costly if you choose high-end options. Again, plumbing and electricals might be necessary which also drives the price up.
- Roof replacement: One of the most expensive projects is to replace a roof. If you’re going to rehab a house on a budget, make sure that the house doesn’t need any major roof repairs or a replacement, before you purchase it.
- Basement or attic remodel: Depending on the project you choose here, remodeling the basement or attic can be upwards of $60,000. Adding an extra bedroom by transforming the attic can be good value for money but this can also be a costly exercise.
Low-Cost Repairs & Renovations
To minimize your rehab costs, you’ll want to find a home that has a good base, and only needs minor cosmetic upgrades. Then you can make sure to do the renovations that will add the most value to the house and be selective about these, to get good value for money on a tighter budget.
- Paint: A new coat of paint can give any room in the house a fast facelift, without breaking the bank. This goes for the kitchen cabinets too, where a fresh coat of paint can change the entire feel of your kitchen.
- Fixtures: Don’t miss out on the small details, these can make a bigger impact. Things like light fixtures, fans, door handles, hinges and so on, can be replaced at affordable prices and make a difference to each room.
- Countertops: Kitchen or bathroom countertops can be a cheaper renovation to do in the home that create a dramatic improvement. It depends largely on the type of countertop, but if you’d prefer to do renovations that are cost efficient, this is one of them.
- Appliances: New appliances can give a kitchen a much newer feel, and these are a smaller upgrade that won’t be as expensive as a major kitchen upgrade.
- Deck or patio: Adding a wooden deck or a patio to the outside of the house can go a long way towards improving a home’s value without spending a fortune. A brick patio can cost anywhere between $6 and $11 per square foot, and a balcony or deck could cost between $50 to $150 per square foot depending on the size of the area and the materials used.
Home Renovation Calculators
If you’re looking for a quick and easy way to estimate your home rehab costs, you can use an online home renovation calculator. There are various apps and websites that provide estimates of prices for the projects that you’ll be doing, and you can use these to calculate the estimated total cost of a rehab. You’ll need to know a few details for this estimate to be as accurate as possible, such as:
- The type of materials and finishes you’d like to use
- Square footage of the area
- The projects you’d like to do in detail
Final Thoughts
Buying a property and then repairing and renovating it before selling it, can be a successful real estate investing strategy for savvy investors. Once you’re in-the-know on all things house flipping you can start your journey, and estimating rehab costs is an important tool to have in your set of skills. That way, you can discern whether a property is worth investing in, or whether you should continue looking for a better deal.