Estimating Rehab Costs

Estimating Rehab Costs: 5-Step Guide For House Flippers & Investors

flipping houses real estate investing strategies Jun 20, 2024

If you're an aspiring real estate investor or even an experienced one, understanding how to estimate rehab costs is crucial for your success. Accurately estimating rehab costs, including both time and money, can significantly impact the profitability of your investment property. This comprehensive guide will teach you everything you need to know about estimating rehab costs, providing you with the confidence to tackle any project.

By following the steps outlined in this guide, you'll learn how to calculate rehab costs effectively, ensuring you are prepared for each property's unique challenges. Whether you are a newcomer or looking to refine your skills, mastering how to estimate rehab costs will help you adapt to unexpected problems and make informed investment decisions.

Estimating rehab costs is a crucial factor in successfully flipping houses, but it's only part of the equation. To maximize your investment potential and capitalize on all the opportunities in your market, enroll in Real Estate Skills' free training program today. Learn the comprehensive strategies and skills needed to thrive in real estate investing. Don't miss out—sign up now!

What Does Rehab Cost Mean In Real Estate?

Rehab costs in real estate refer to the expenses incurred in repairing and renovating a property to bring it to its optimal condition. These costs encompass everything from the materials and specialized tools required to the labor involved in the transformation process. Estimating rehab costs accurately is crucial for real estate investors as it directly impacts a project's profitability and feasibility.

Various factors must be considered when estimating rehab costs, such as the scope of the renovations, the quality of materials, the cost of labor, and any unexpected repairs that may arise during the project. Knowing how to estimate rehab costs involves thoroughly assessing the property’s current condition, detailed planning, and obtaining multiple quotes from contractors.

Real estate investors often break down the project into specific categories such as exterior repairs, interior renovations, system upgrades (like plumbing and electrical), and cosmetic improvements to calculate rehab costs effectively. Each category is analyzed for cost estimation, ensuring a comprehensive budget that minimizes surprises and maximizes return on investment.

In the real estate industry, terms like rehab, repair, and renovation costs are frequently used interchangeably. However, they all refer to the same concept of calculating the expenses involved in property rehabilitation. Understanding how to calculate rehab costs accurately is a skill that can significantly enhance your investment strategy and help you capitalize on opportunities within your market.

Read Also: Rehabbing A House: The Beginner’s Guide To House Flipping

Why Is Estimating Rehab Costs Important?

Estimating rehab costs is essential for new real estate investors to determine a budget and ultimately assess the profitability of a potential deal. Knowing the full rehab cost upfront allows investors to make informed decisions about whether a property is worth flipping. By accurately estimating rehab costs, investors are one step closer to learning how to flip a house with no experience. As a result, they'll be more equipped to avoid unexpected expenses and ensure they allocate enough funds to cover all necessary repairs and renovations.

Understanding how to calculate rehab costs is a critical component of flipping houses 101, especially for new investors; this involves assessing the property's current condition and planning for both major and minor repairs. This process helps investors determine the total investment required, including labor, materials, and any unforeseen issues that may arise. Accurately estimating repair costs on a rehab ensures that investors can create a realistic budget and timeline for the project.

Investors need to know how much they must spend on a deal before acquiring it to avoid financial pitfalls and maximize return on investment. A thorough estimation of rehab costs can also help investors negotiate better deals with sellers, secure financing, and set competitive listing prices once the property is ready for sale. In summary, knowing how to estimate rehab costs is crucial for successful real estate investing, enabling investors to make profitable decisions and capitalize on market opportunities.

Read Also: Is Flipping Houses Profitable? Statistics, Trends & Forecasts

How To Estimate Rehab Costs In 5 Steps

Whether you're a beginner in the world of real estate or a seasoned investor looking to sharpen your skills, this step-by-step guide will provide you with valuable insights and strategies to help you confidently estimate rehab costs and navigate the exciting world of real estate investing:

  1. Learn Your Market
  2. Property Inspection
  3. Create A Scope Of Work
  4. Obtain General Contractor Bids
  5. Compare Quotes & Add A Contingency

estimate rehab costs in 5 steps

Get ready to dive in and gain the knowledge you need to make informed decisions and succeed in your rehab projects.

Read Also: How To Flip Houses With No Money: Top 10 Expert Strategies

1. Learn Your Market

The first step in estimating rehab costs is learning your market. Understanding the market involves pulling comps and examining all the houses your rehab project will be compared to. This step is crucial because it helps you identify what actually needs to be done to the subject property to ensure it stands out without exceeding your budget.

To begin, pull comps from recent sales in the neighborhood to get an accurate picture of what similar homes are selling for. Look at the condition, features, and upgrades of these comparable properties. This will provide a benchmark for how to calculate rehab costs and determine the full rehab cost for your project. By knowing the standard set by other homes, you can plan your renovations to include the best ROI home improvements, making your property slightly better than the comps and ensuring it is the most desirable home on the street.

Understanding how to estimate repair costs on a rehab is essential for setting a realistic budget. If you over-improve the property, you risk spending more than the market will support, which can reduce your profit margin. Conversely, the property may not sell quickly or for the desired price if you under-improve. Focus on the best ROI home improvements, such as kitchen upgrades, bathroom remodels, and curb appeal enhancements, to add value without overspending.

In summary, learning your market is the foundational step in estimating rehab costs. It ensures that you make informed decisions, set a realistic budget, and maximize your investment by making the property attractive to potential buyers. This approach helps in accurately estimating rehab costs and achieving a successful and profitable rehab project.

2. Property Inspection

If you determine that the property has the potential for profit, the next step is to get or perform a detailed property inspection. This walkthrough inspection should give you a detailed look at what must be fixed to legally rent or resell the property in your area. It is also a critical part of the due diligence process for any home purchase and is usually required by a lender. Give high priority to the items that this inspection identifies as problematic.

The property inspection will not identify items that are considered cosmetic. For example, while a property inspection can tell you that a roof will need to be replaced in the next three years, it cannot tell you that it's an odd color that will repel potential buyers.

Similarly, a property inspection will not indicate that appliances need to be modernized or bathroom fixtures updated. The specific needs for these types of rehab projects will likely be based on the comps in the area.

3. Create A Scope Of Work

A scope of work is a detailed list of all of the renovation projects and repair work that will be performed at a property. When making this list, be sure to include:

  • Interior & Exterior Paint: Even if the paint is in good shape, it may be necessary to switch to more modern or neutral colors. Fortunately, pain is usually one of the most cost-effective upgrades that can be made to a property.
  • Flooring: Tile pieces that are cracked and carpet that is worn out will definitely need to be replaced. The flooring may also need to be replaced, however, if it makes a room look dated. Consider reflooring an entire house, even if just several rooms need it; the cost difference is usually negligible.
  • HVAC: This stands for Heating, Ventilation, and Air Conditioning. Your real estate agent should be able to tell you how old the system is. If it's in good repair, replacing it may not make sense.
  • Roof & Soffit Work: The age of the roof can have a big impact on how much you're able to sell a house for. In some regions of the country, you may want to consider getting a wind mitigation report on the roof. For just a few hundred dollars, these reports can be a huge selling feature for a home.
  • Electrical & Lighting: If your home inspector flags any electrical items, you'll want to prioritize the repairs above nearly every other item on the list. Renting a home with faulty wiring is illegal in most cities, and if you're trying to flip the property, be aware that many buyers will walk from a home with electrical issues.
  • Plumbing: Your home inspector should make you aware of faulty pipes and existing water damage. Be careful when picking projects to repair water damage. Simply covering up evidence of this damage can get you in a lot of trouble.
  • Baths (Including Cabinetry & Fixtures): Modernizing cabinets can sometimes be as simple as painting them. Talk to your contractor about rehab options.
  • Kitchen (Including Appliances & Countertops): Consider the type of appliance that is being purchased and the finish for the countertop carefully. Expensive items in a lower-end home are often a waste of money, while cheap items in a higher-end home will make it very difficult to sell.
  • Landscaping, Sheds & Porches: Carefully consider whether it makes sense to rehab or demolish damaged outbuildings.
  • Pools: These usually require a different contractor who specializes in pool repair if repairs need to be made.
  • Pest control: This includes correcting damage from termites.

Specifically, while you're compiling your list, consider these questions that many real estate investors often overlook:

  • What is the condition of the flooring? Can carpets or laminate simply be cleaned, or do they need to be replaced?
  • Are the walls in good condition? What needs a new coat of paint?
  • Are the kitchens and bathrooms up-to-date? Can they be made more modern with paint, or are there features that need to be torn out and replaced?
  • What is the condition of the landscaping?
  • Are there any other obvious items that need to be removed, cleaned up, or replaced?

Your scope of work will vary a lot based on whether you intend to rent out the house or make it into a flipper.

Rental property needs to start generating cash as soon as possible. The property needs to be in good repair to meet local housing requirements, but higher-end upgrades tend to add little to the amount of rent a tenant is willing to pay.

For example, investing in landscaping for a rental property rarely makes financial sense.

A budget for a rental property should strongly focus on repair costs. Everything must be functional for a tenant to move in, and minor cosmetic details can usually be ignored.

Houses that will be improved in a few weeks or months and resold, or "flippers," will need a rehab budget that focuses on cosmetic upgrades.

These investments aim to improve a property so that it can sell for a higher price than it was purchased for. That means the focus needs to be on upgrades that add to the perceived value of a property.

Read Also: Free ARV Calculator: After Repair Value Calculation

4. Obtain General Contractor Bids

The next step in estimating rehab costs is obtaining general contractor bids. Getting bids from at least three contractors with whom you intend to work on the property is crucial. This allows you to compare and determine who is the best fit at the right price. When learning how to calculate rehab costs, remember that the best contractor isn't always the cheapest. Quality, reliability, and experience are essential factors that can significantly impact the project's success and overall full rehab cost per square foot.

By obtaining multiple bids, you gain a clearer picture of the labor and materials market rates, helping you estimate repair costs on a rehab more accurately. Each contractor may offer different insights or solutions that can affect the total cost and quality of work. It's important to review each bid thoroughly, considering the scope of work, timeline, and contractor's reputation.

Choosing the best general contractor can prevent costly mistakes and delays, ensuring the project stays on track and within budget. This step is vital for accurately estimating rehab costs and achieving a successful, profitable rehab project. Prioritize value over price to ensure your investment yields the best results.

5. Compare Quotes & Add A Contingency

The final step in estimating rehab costs is comparing the quotes you receive from contractors and adding a contingency budget of about 5% to 10% to cover unexpected costs. After obtaining bids from at least three contractors, carefully compare each quote to understand the breakdown of labor, materials, and other expenses. This comparison will help you determine the best value and ensure accurate budgeting.

When learning how to calculate rehab costs, it’s essential to look beyond the total price. Assess the scope of work, the contractor's experience, and their reputation. A home rehab cost estimator can be a helpful tool to cross-check the quotes and ensure they align with market rates.

Including a contingency budget is crucial in how to estimate repair costs on a rehab. This buffer of 5% to 10% accounts for unforeseen expenses that often arise during renovations, such as hidden damages or changes in material prices. By planning for these potential costs, you ensure that your project remains on track and within budget.

In summary, comparing contractor quotes and adding a contingency budget are vital steps in estimating rehab costs. This thorough approach ensures you are prepared for unexpected expenses and helps you achieve a successful, profitable rehab project.

What Is An Example Of A Rehab Job?

Here's one of the bathrooms we recently rehabbed in San Diego, CA. We tore out the old bathtub and pink wall tiles, took the walls down to the studs, and then installed a tile-surround shower. Remember, a bathroom rehab job can add more value to a home or rental unit than it costs to repair. Bathroom and kitchen renovations can produce some of the best ROI.

example of rehab job

How Much Does It Cost Per Square Foot To Rehab A House?

You can use the square footage of a home to estimate rehab costs, but it's essential to understand that this is just an average based on the condition of the home. The cost to rehab per square foot can vary widely depending on the extent of the repairs needed.

For homes in good shape that only require cosmetic repairs, such as painting, minor drywall fixes, and updating fixtures, the cost can be about $10 per square foot. If the home is generally in good condition but outdated, requiring more significant updates like new flooring, modernized kitchens and bathrooms, and moderate repairs, rehab costs can jump to around $30 per square foot.

For houses in horrible shape that need extensive repairs, including structural work, electrical and plumbing upgrades, and major renovations, the cost to rehab can reach approximately $60 per square foot. These figures are just estimates and can vary based on factors like local labor rates, material costs, and the specific requirements of the project.

When estimating rehab costs, it's important to conduct a thorough inspection and get detailed quotes from contractors. This will provide a more accurate picture of how to calculate rehab costs and how to estimate repair costs on a rehab project. Always plan for contingencies to cover any unexpected expenses that may arise during the renovation process.

How Much Does A Full Rehab Cost?

how much does a total rehab cost?

Total rehab jobs are rehab projects that involve actually changing or making extensive repairs to the structure of a home.

This can include replacing a roof, water heater, and/or HVAC system. It is also not uncommon for total rehabs to involve the demolition or removal of all appliances and cabinetry in a kitchen and complete remodels of bathrooms. A rough estimate for a total rehab is between $60 to $100 per square foot.

For comparison, new construction homes have a cost range of around $180 to $250 per square foot. These estimates are not very reliable, however. Just like cosmetic rehab projects, material and labor costs can vary wildly based on the economy, local market conditions, and even the season of the year.

What Is The Most Accurate Method Of Estimating Costs On A Rehab?

There are several ways to get estimates of the repair costs of a rehab project. Each of these methods has advantages and disadvantages:

  • Square Footage
  • Previous Costs
  • Contractor Quotes

Rehab Cost Per Square Footage

Estimating rehab costs based on the square footage of a home is one of the least accurate methods for determining costs, but it is also one of the quickest.

This method tends to work best for real estate investors that invest in properties with similar levels of disrepair; they can use the cost of their previous rehabs to estimate the cost of their next one. This method is notoriously unreliable, however, and shouldn't be used for actual cost estimates when considering a purchase of a property.

Previous Costs

Many experienced real estate investors make an estimate of needed repairs based on what they have paid in the past for similar jobs. While this method is more reliable than a square footage estimate, there are several problems.

  • Every Project Is Different: Just because a floor replacement or cabinet swap costs a certain amount in a previous property does not mean that the scope of work for this project will be the same. A new project may have more extensive damage, need more materials, or require additional labor.
  • Material & Labor Costs May Have Changed: In certain markets, the cost of materials can vary wildly. Combined with the supply shortages and demand for construction materials all over the nation, it can be very difficult to use the costs for a previous project to estimate the costs for this one. Many real estate investors have also reported a dramatic rise in labor prices as general contractors are seeing an increased demand for their services and a shortage of skilled labor.

Contractor Quotes

The best way to get an accurate estimate of the repair costs associated with a rehab project is to get actual quotes from contractors. Contractors can provide quotes for the actual project and can take into account all of the project variables.

Just be sure to pay attention to the length of time that the quotes are good for. Many contractors are offering very short time periods on their material estimates.

Whether you're virtual wholesaling, flipping houses, or building a rental portfolio, getting a line-item bid from local contractors will give you the most accurate price range for your rehab projects.

5 Factors That Affect The Cost Of Rehabbing A House

When estimating rehab costs in real estate, it's essential to recognize that the actual expenses can vary based on several factors. Understanding these factors is crucial for investors and flippers who want to assess the potential costs involved in rehabilitating a property accurately.

By considering these factors, you can refine your estimated rehab costs and make more informed decisions in your real estate ventures:

  • Price Of Materials: The price of materials can vary greatly based on market conditions. For example, plywood that used to be purchased for $5 a sheet just three years ago can now go as high as $65 a sheet. Inflation, supply chain issues, and local market demand can all affect the price of materials.
  • Quality Of Finishes: Laminate costs a fraction of the price of hardwood. Granite countertops can be triple the cost of laminate ones. Choosing more expensive finishes is possible to greatly increase a rehab budget. All too often, however, real estate flippers make the mistake of picking the cheapest options available. While this can be a good strategy for low-end properties, it is a bad choice for higher-end properties, as it will make them much more difficult to sell. When choosing finishes, study the comps for your property and choose materials of similar quality.
  • Cost Of Labor: Skilled labor is often the most expensive part of a rehab project. Labor costs are usually dependent on market conditions such as availability and local wage scale. Some contractors try to save money by replacing skilled labor with less skilled or unskilled workers. While this can work for projects such as landscaping, correcting mistakes made by workers who don't know what they're doing is often more expensive.
  • Location: Local market conditions can greatly affect all aspects of a project. Areas with high wage scales and high demand for construction will see much higher prices across the board than areas without these conditions.
  • Timeframe: If a project needs to be done immediately, expect to pay more for it, especially if it involves a high amount of in-demand skilled labor. If your project timeline is dependent on certain projects being completed quickly, be sure to incorporate this higher cost into your budget.

What’s The Best Rehab Cost Estimating Software?

We can recommend BlueHammer as a helpful cost-estimating software.

There are several different types of software that can be used to estimate project costs. Many real estate investors rely on these programs, especially in markets where materials and labor costs can change frequently.

Using rehab cost estimating software is also good for investors who want to run multiple scenarios for potential property investment. Looking at how different materials or timelines can affect a project's budget can go a long way toward determining the scope of work that will be required.

Final Thoughts

Real estate investment is one of the most rewarding career fields, but it does involve a lot of planning and research. Estimating rehab costs and determining a scope of work is often a long process that requires days of research. Once developed, however, the real estate investor will have a workable guide to everything that is supposed to happen with their property in order to obtain the highest after-repair value (ARV). Realize that the estimation process is just that—a process. An investor will have to make multiple adjustments as prices change, workers' schedules shift, and projects become more involved. Every project will be unique, and the investor must be willing to be flexible.

Estimating rehab costs is just one step in the larger process of successful real estate investing. To fully take advantage of the opportunities in your market, enroll in Real Estate Skills' free training program. Gain the comprehensive knowledge and skills you need to maximize your investment potential and achieve success. Don't miss out—sign up today!

*Disclosure: Real Estate Skills is not a law firm, and the information contained here does not constitute legal advice. You should consult with an attorney before making any legal conclusions. The information presented here is educational in nature. All investments involve risks, and the past performance of an investment, industry, sector, and/or market does not guarantee future returns or results. Investors are responsible for any investment decision they make. Such decisions should be based on an evaluation of their financial situation, investment objectives, risk tolerance, and liquidity needs.

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