We love rehabs! They’re wonderfully annoying as they are profitable.
Seriously, finishing a rehab project is like getting over a cold. Once it’s over we need a couple weeks to get back to normal before we would even consider doing one again.
Well, not only are they time consuming and involve a lot of moving parts, they can also get expensive.
How do you know where to begin estimating renovation costs when you start out as a real estate investor?
We’ve discussed purchasing 2 houses for $11k, but how do you know if that’s even a good deal?
How do you get the houses to livable condition without breaking the bank? How much is “breaking the bank” exactly???
Let’s start at the beginning. Regardless of whether or not we decide to purchase a property, we start by doing a walk through. This allows us to see the interior condition of the home.
During the walk through, we love to use an app called RoomScanPro (approx. $5) to take basic floor plans.
When we compared these floor plans with what the auditor’s site had on file we were able to get an idea of the size of the property and outline an initial scope of work.
This allows us to get the size of the living room, bathroom, kitchen and other major areas for basic flooring estimates. Anyone who has watched an episode of HGTV knows that it can be difficult to remember the details of a house after the walkthrough is complete.
A basic floor plan helps us know how much it will cost to buy paint. We purchase paint in 5 gallon buckets, based on our estimates, roughly two 5 gallon buckets will cover a whole house.
The floor plan also allows us to estimate flooring. For example, if we were to install ceramic tile, we would do so only in the kitchens and bathrooms.
The floor plan gives us a rough estimate of the square footage of each room. We can say, for example, that the kitchen and bathroom account for approximately 1/3 of the entrance floor’s square footage.
So, for example, if we know that the total floor area is 600sqft, we know that we would need about 200 sq ft of tile without pulling out a tape measure.
We may not know hard numbers but we do know the cost of materials. Just like anything else, there is a sequence, an order of operations so to speak. You can go back and forth to see if the price works for you.
Just like shopping for any other big-ticket item, you can have your set budget and see what service persons are willing to work with. You can then add in or take items out of the scope of work to meet your budget.
How much do these items actually cost?
Let’s say you’re working on the kitchen and you need new countertops. You can literally use lowes.com to price out the cost of laminate countertops. We would just start pricing out basic countertops, floor tile per sq ft. and other items to compile a list for every room.
The exact numbers are not the point. The point is that you have to get a rough idea of how much stuff costs.
Once you start, you’ll realize that stuff isn’t really that expensive. It’s the same money that you’re putting elsewhere that can be used to build your portfolio.
Also, how many times have you viewed a place but couldn’t remember the details of it after you were back home? Was it the one with the walk out basement or did it have the shower in the master bathroom? By starting with a simple floor plan you can eliminate that need early on.
here’s the point: we recommend that you be hands on with your investments. At least in the beginning.
That’s right. Don’t be passive.
At the very least participate in a partnership where you can get a lot of transparency. This will allow you to learn. We know there is a lot of hype around having others manage your properties on your behalf. here’s the rub: You never get the first-hand knowledge or experience of what things cost.
Having third-party management is great, after you know what you’re doing and you can be sure that you are receiving good service at a fair price. Knowing fair market rate for both materials and labor can be a really crucial step when you’re beginning.
Particularly if you want to grow. You’re skipping over the details that allow you to really monitor the books. Missing that component may impede your growth. That’s how you learn! You know the benchmarks. You know what’s too high for labor and what’s too low for quality work. Just like in other areas of life, experience helps you get better over time.
By taking the time to learn the cost of goods and labor, it will enable you to better evaluate deals in the future. You can now assess a property quickly because you have a basic benchmark. When you buy turnkey, you don’t know what anything costs – you just paid a premium for the final premium product.
That’s ok, but for LLP readers, we want you to be hands on. Buying Freedom is taking ownership of the process and the responsibility.
Even if you get a property manager later on, initially you need to do the work (or at least have a clue how the work is done).
We’re not telling you that you necessarily need to swing a hammer…we’re saying, know how much the hammer costs as well as the dry wall they’re nailing into.
Is our advice irrational?
Not at all. Look at HGTV for some home renovation comparable experiences. Flip or Flop, Property Brothers, you name it, they are all demoing the sites together. Even million dollar buyers are not “too good” to get dirty. The point is to give you a flavor or what it’s like to do this type of work. Let’s be honest, it is completely different from office or brain work or other roles and positions. This will also help you respect the process. Hopefully when you’re done you will not over-value it, but not under-value its worth either.
Look, reading LLP is not for fence-sitters.
This is a website about action and taking first-hand responsibility for your financial future (and financial independence). No pansies here! Taking full responsibility means no excuses. Freedom takes work. No exceptions. We’re just saying that on your first investment (or 3!), take the time to understand fair market rate for the goods and services needed to make a house a home.
It’ll make you a more knowledgeable investors and allow you to move up the real estate value chain. It’s no different from in your day job, the more you understand the supply chain and the value-add steps, the more valuable you become to the (your) company.