How Much Is That Next Investment Home ? Calculating Renovation Costs by Robert H. Lett

How to calculate rehab costs of a property? This is another question Real Estate investors ask quiet frequently. So I'll try my best to answer them here so others can benefit from the answers.

Your rehab costs will all depend on how much of a repair project it is and if there is any major repairs that might need to be done. Another factor will be if you plan to do the work yourself and create "sweat-equity" or hirer out to a sub-contractor or a more expensive general contractor. If you're half way handy and you have the basic hand tools that would be used around the house, you can probably do most of the work yourself and save thousands of dollars. In the past, I've even thrown in a small fudge factor of $2000 to $3000 just in case you find something more major after tearing into the project. You never know what else you might find when you tear out a wall or start ripping out the kitchen cabinets. The fudge factor can sometimes save you on your profits. And if it's not needed, you will have that much more a profit margin built into the deal.

Always check with your local zoning and other laws to make sure you can perform the work in question.

Now I'll admit, carpet and roof replacement are not something I'll ever attack again. For one, a roof is hard work, and as far as kicking carpet, that's another skill I've learned that I don't possess. One of my tenants back in the early 2000's told me that the carpet had a small wrinkle in the middle of the floor, she wasn't too worried about it because the coffee table covered it. She said whoever you hired to lay the carpet, she didn't suggest that I hire them again. I never had the heart to tell her I was one that did it.

Some states require certain things to be done before a mortgage can be funded in that state. Always check with your local real estate attorney, closer, title company, or real estate agent for what might be required. These inspections, tests, and results will have to be added to your overall rehab costs.

I'll give you an example; In South Carolina and most of the south eastern states, you are required to pass a termite inspection prior to closing. Depending on how you obtained the property, you might not have had a conventional closing, meaning the home inspection was never accomplished when you acquire the property. Since I obtained the property in a creative, non-conventional way, I was the only one to do any type of inspection, and I did that from the west coast. But, after you rehab the property and try to sell it to a future owner, the issue hits you in the face, not good if you're not ready for it! In the early 2000's I learned my lesson hard by gaining a $16,000 bill that had to be accomplished prior to closing on the property. To say the least, the entire deal was a loss.
I wrote a simple spreadsheet tool that I've been using since the late 1990's to help make estimating and listing items that the property needs easy. It can run on your computer and your smartphone and you can edit it on the fly. It lists almost all the normal items that you might need for a rehab project. You can fill in the square footage of the property room-by-room and the program will give you how many gallons of paint are required and the cost for the paint. And even calculate the amount of ceiling paint required in a separate column. Of course, you'll want to save money by buying the 5 gallon buckets instead of the gallon buckets, so it will over estimate your price on the paint by a little. So just be aware of that.

Walking through the property will usually tell you what's needed as far as repairs. If you locate a property that needs a lot more than just cleaning, cosmetics, painting, and patching, you might want to pass on the deal if you're new to the Real Estate investment arena.

In the next article I will address closing costs and holding fees of a Real Estate investment.