How to Estimate Rehab Costs

Learning how to ‘run your numbers’ is a key component of flipping houses. The most important numbers are:

1) Acquisition cost
2) Financing cost
3) Resale Price
4) Rehab Cost

Today we’re going to talk about #4 — estimating your rehab costs. Get this number wrong and not only could you sabotage your expected profit but you could actually end up losing money. Get it right and BAM — you’re in the green!

When you’re visiting a house for the first time, it’s helpful to have a sheet with you that details out the cost for each rehab item. Then you just check each item and tally up your costs. Full kitchen renovation? Check. One full bathroom and one half bath? Check, check. New roof? Check. Tally up — $34,000.

If you really nail this system down, you can be in and out of a typical house in 30 minutes or less with a solid idea of how much your rehab is going to cost. Maybe you won’t get it down to the exact dollar, but you’ll be pretty darn close. Knowing this, you can then figure out your other numbers and come up with your MAO (that’s Maximum Allowable Offer for you folks who like the lingo).

Think about how much time this can save you. Maybe you can visit 1 or 2 more houses each and every day! Think that will increase your efficiency and, therefore, your bottom line? You better believe it.

But we need to backtrack a minute. How do you know that bathroom remodel will cost $5,250? There are a couple ways to really tighten up that number so you’re prepared when you get a call on that Ewa Beach fixer upper and need to go visit the house for the first time.

Have a Handyman or General Contractor Give You an Estimate

“Wait a second, Mike” you say. “I thought the plan is to be able to properly estimate the cost when I first visit the property, not when I have a handyman or GC walk the house during my inspection period.”

You’re correct, but when you’re starting out you might need to get a few estimates to make sure your numbers are right. Do this a few times and you’ll quickly get an idea of what your kitchen tile floor will cost and how much that fourth bedroom extension on your Kaimuki single family house will add to your rehab budget. Eventually you won’t need them with you on the first visit but only when you want to be sure you didn’t miss anything.

Go For a Long Walk

Another way is to spend an afternoon or two at Home Depot or Lowe’s with a tablet of paper and pen in hand. Price out your materials at different grades. Corian vs granite countertops; hardwood vs tile vs carpet floors and different grade appliances. Don’t be afraid to chat up the employees — they should know how much the labor should cost to install the materials you’re scoping out.

Take these material costs and put them in your rehab sheet that you take with you on your site visits. Don’t reinvent the wheel every time — stay efficient.

You Don’t Need to Be Perfect….

Again, the idea is not to get the perfect repair estimate inside of a half hour. The idea is to be able to act on a moment’s notice on that Mililani hot deal and know within a couple thousand dollars and 30 minutes onsite whether that rehab is going to cost you $20,000 or $40,000 to fix up.

Here’s the REAL POWER in this skill. If you can figure out your repair estimate while visiting with the seller for the first time, then you can go to contract right then and there! Don’t give them the opportunity to call up a competitor while you mull it over and reschedule another meeting a few days later in the week. That window of opportunity is GONE, my friend!

Knowing how to estimate rehab costs is a key skill for any real estate investor interested in flipping houses. Practice it until you’ve systemized the process and you’ll save both time and money on your deals.