Should I jump into a major rehab with the cost of materials

47 Replies

I want to brrrr or flip properties and was super pumped, ready to jump in but I'm seeing the cost of rehab material out of control... Curious what other BP investors are thinking about these issues? I know you want to buy the property at the right price based on the numbers but how are other investors dealing with today's material costs with major rehabs and staying on budget or estimating the true cost to do a major rehab?

I live in Madison Wisconsin listed below are my average costs for a few basic rehab materials.

- 4X8 drywall 1/2" $15

- 2X4X8' $14

- 4X8 5/8" OSB & Plywood $59 sheet

I also checked with several appliance stores for appliance packages and stock and availability seems to be a challenge for a matching appliance package as well as the price has climbed quite a bit?

Thoughts - Comments?

the cost of materials has gone up but so has the selling prices many markets 

So add up cost of property + rehab costs + holding costs 

Compare to expected selling price minus selling expenses 



In addition to the rising prices, just getting materials to complete a job could be a problem.  I was appraising a property today and windows ordered months ago are still months out.  In a seasonal market like WI where things slow in the winter, there is also risk of holding a property longer than anticipated.  We did a bath remodel and to expedite the project made a few longer trips to get materials where we could find them.

@Jeff Modjeska I’m contemplating a major rehab right now. The building itself is down to the studs and it needs to have a new foundation poured.

However when it is done it can either be refinanced and cash flow a little to buy something else or I will have a cash flowing cow.

We’ve factored in the costs and have the capital to put into it without having to finance it.

I’ve got some other properties that need to season a bit before I can get another mortgage from a bank. I could use creative financing if something great comes along in the meantime but I’m happy with this rehab for now even with the costs.

We still have some $5,000 houses in the inner city of Milwaukee - maybe you want to buy a few and sell them for parts :-)

Personally I don't like ' major rehabs' unless the margins are enormous regardless of the cost of material.  If it was something I was considering, I would just build in the cost to my offer price.

Originally posted by @Ian Walsh :

Personally I don't like ' major rehabs' unless the margins are enormous regardless of the cost of material.  If it was something I was considering, I would just build in the cost to my offer price.

YUP much rather do new builds than major remodels much easier to control timing and pricing. And usually much better subs 

 

@Jeff Modjeska I have heard rental property owners and rehabbers complain about the cost of materials, but keep in mind cost is only a problem if your selling price doesn't reflect your costs. I am sure there are other flippers in your market who are also paying similar price for materials. In other words, your competition has the same costs as you. That means you are all raising prices to hold margin. The only risk in a fast moving market is sellers who under price the market. 

@Joe Splitrock

For me this is not a complaint of how much the materials cost today its more of a question of how much they will cost a few months from now. For instance on April 18th at my local Home Depot a sheet of OSB was $53.95. On May 11th the same sheet was $64.65. That's about a 20% increase in less than a month. I put a house under contract April 21. When it closes this week some materials are 20% higher what will they be over the course of the next 2 or 3 months while renovations are under way.

So do we just increase material cost by how much?

Originally posted by @Craig Parsons :

@Joe Splitrock

For me this is not a complaint of how much the materials cost today its more of a question of how much they will cost a few months from now. For instance on April 18th at my local Home Depot a sheet of OSB was $53.95. On May 11th the same sheet was $64.65. That's about a 20% increase in less than a month. I put a house under contract April 21. When it closes this week some materials are 20% higher what will they be over the course of the next 2 or 3 months while renovations are under way.

So do we just increase material cost by how much?

 Materials will not keep going up at 20%. Eventually supply will ramp up and/or demand decreases. At that point the price stabilizes or even goes down. That being said, I don't know if that is next month or the month after. Summer is always more busy for construction, so that puts added demands on. I would assume adding 20% buffer should cover you in an estimate. I would also advise buying materials sooner rather than waiting. In addition to price bumps, there have been supply shortages. 

Just buy one ready to go or only needing clean--up, paint and flooring below market value.  Off-market, cash, no middlemen, seller-financed,  etc. 

Look on your closing statement and figure out how to do the high dollar stuff yourself. 

While people are sweating drywall , OSB  2x4 prices and labor availability, you'll be taking a nap or on the golf course.  Maybe a nap in the clubhouse. Get creative. 

It's risky, for sure. We're currently not doing any flips but we're still buying long term properties that require significant repairs. We had stopped doing flips after 2018 because there were just too many investors living the Chip & Joanna life paying too much for properties and driving up the acquisition price on flips. But the buy and hold investments are a longer term play so you have more time to recoup your investment. That said, the numbers are still critical to the deal so you really have to have cushion. We're giving ourselves a 25-30% cushion over and above our estimated costs where previously we gave ourselves 10-15%. And yes, this is definitely slowing - but not stopping - our acquisitions. One other thought: I don't know if this is also a problem where you're at but ALL of our trades are booked out solid for months. This is due to the massive CA wildfires over the last few years and builders having more work than they can handle doing the rebuilds. It is really hard to get a commitment if you don't have prior relationships. So you also have to factor in extended holding costs if you're doing the BRRRR method. So it's not just the increase in material costs you have to take into consideration. It's challenging, but obstacles are meant to be overcome.

Originally posted by @Jeff Modjeska :

Thanks for your comment Michael I'm just nervous about estimating the true total cost of materials and a complete rehab budget.

I did my first rehab almost 40 years ago 

I would not suggest a major rehab for your first one.  Come to think of it I have never done a major rehab. 

Down to the studs is for TV shows and rock star rehabbers.   Which I am neither 

Too many good deals with lots of fat on the bone for me to get into major rehabs 

 

I have done a major rehab about 10 years ago, I would certainly consider buying a property that required less work. Unfortunately I have not run across a good deal that would cash flow and not require a lot of work...