I am just curious, what do you guys budget for a gut rehab on like a 1500 SqFt Single Family? I know it ranges, but I am interested in what the different costs are out there. When I mean gut, I mean, putting in new pipes, electric, walls, doors, everything. Even siding outside.
PS, my last post was in thousands. If you want to see what you can do for $50/ s.f. check my site and look for "the abandonded house" Complete gut down to the studs with a mid/high end finish out including all new mechanicals, roof, windows, exterior stucco and landscape. Good luck!
@J and G :):
Thanks for your response, now I have a problem, why is the ARV of the property lower then the investment? No one lend me $462k for a rehab (if $50/sqf), when the house has a lower value.
What is wrong here? I need a new appraisal (constructive to the rreal rehab costs). Do I have this right?
The property is in Ohio.
Uwe -
It's possible the numbers just don't work out.
As a lot of people here will tell you (including me), there are plenty of houses out there that wouldn't be worth taking, even for free.
I see houses everyday that need $70K worth of rehab, but would only be worth about $80-90K after repair. Even if I got them for free, between holding costs, commissions, and closing costs, I'd lose money!
One BIG thing to consider though:
The property you're talking about is not a SFH, it's an investment property. The way you determine the value of a cash flowing investment property is different than the way you determine the value of a SFH.
For SFH, you use comps. For investments, you use an income approach to determining value (basically, the value is based on how much income the property will generate).
Thanks again for your advice.
My math:
The average rent for 2 bed is $680 x 13 = $8,840 x 12 = $106,080 year - 10% vacancy ($10,608) = $95,472 - 40% expenses ($38,188) = $57,284 NOI / 11.5% CAP-Rate in surrounded area = $658,766 ARV is this correct?
Why only 40% expenses? Clearance: county tax = $4,270, all utilitys are separated, tenant pays gas, water, electric, only A/C and Trash the owner = $12,890, property management = $8,028, maintenance = $10,000, other = $3,000 (all $38,188)
if the ARV over $650k in this case, I have a financing
My math:
The average rent for 2 bed is $680 x 13 = $8,840 x 12 = $106,080 year - 10% vacancy ($10,608) = $95,472 - 40% expenses ($38,188) = $57,284 NOI / 11.5% CAP-Rate in surrounded area = $658,766 ARV is this correct?
50% expenses (including vacancy) is a good rule of thumb, so you're okay there (at least for an initial analysis).
I would question your 11.5% cap rate. I don't know where you live, but this is pretty high for most big markets these days. If you live in a smaller market or in a place that's already gotten beaten up in the commercial sector, this may be correct, but I'm not sure it's the number you'll want to use to calculate value.
For example, if you think that you'll hold the property for, say, 5 years, and expect that you'd be able to resell it in 5 years at a 10% cap rate, then the resale value in 5 years will be $572K (assume income and expenses remain unchanged).
If that's the case, you'll want to buy lower than that, so that you have a built-in profit, even in the case where NOI doesn't increase in that time frame.
So, I would recommend that you still with a lower cap rate to evaluate valuation, even if many of the buildings are seemingly going for 11-12% (remember, you don't really know another properties cap rate, and you shouldn't trust what another investor tell you!)...
J Scott,
The CAP Rate is from a property manager, he knows the conditions in this area, but I can live with 9% too.
I will buy, fix and hold this house forever, this is my Goal. The location is SW Ohio Greater Cincinnati and Dayton.
The great question is: Calculate the bank appraiser the real commercial appraisal based on my math here?
J Scott,
The CAP Rate is from a property manager, he knows the conditions in this area, but I can live with 9% too.
I will buy, fix and hold this house forever, this is my Goal. The location is SW Ohio Greater Cincinnati and Dayton.
The great question is: Calculate the bank appraiser the real commercial appraisal based on my math here?
A good appraiser would be using the income approach to appraisal on this property; barring that, they should be using a per-door comp analysis. Either of those should be much closer to the value we determined, assuming you're correct in your income/expense estimates.
I would ask to see a copy of the previous appraisal and see how he put it together, and what assumptions he used. Then work from there...
I completed a gut rehab 3 years ago of a 3 bedroom apartment that was 1300 SF. It came in at $65 PSF. The scope included: demo to the studs. new electrical, new plumbing and fixtures, new 1/2 bath, new fixt. and plumb. in existing full bath, a little framing for rot and sagging floors, total new IKEA kitchen, new HVAC ducts and controls (reused furnace), new water heater, all new insulation (house is circa 1914 - no insulation), new drywall, elect. fixtures. We self-performed, kitchen, wood trim, paint and vinyl tile in kitchen and bath. Location was Norwalk, CT where the cost of construction is about 110% of the national avg. Hope this helps.
@Tom Tarrant. Your are definitely a Pro no doubt about that. I am very new at this business and just bought my first property last week and I am ready for the challenge. Question how much have those prices gone up since your postings in 2009? as far as I know some prices are lower like cabinets, and nice floors, on the other hand I got a quote from a framing guy to do and addition and he quoted me $120.00 for rough construction (including plumbing and electrical) claiming that wood prices had gone up 30% in the last month. Anyways I am still calculating $40-$50 sq/ft for the rehab (not 100% to the studs) and about $130 sq/ft for the finished addition. based on your recent projects what are the cost now a days. thanks!
It would be interesting to see how these quotes have gone up over time in those areas.
Currently in Los Angeles, if I'm putting in most of the sweat equity, then I've been able to go as low as $20/square foot, if I self manage it goes up to at least $50/square foot, and if I hire it all out, we very easily end up close to $100/square foot.
There's just so much competition for labor in this and many other markets, that it is a contractor's seller market right now.
Because of that, generally I analyze my deals at hire prices, and our rehab budgets are rarely below $120K. There's currently no way you can make money on a paint and floors house rehab unless you're doing it yourself, so you have to make bigger swings and add square footage, or add value in some other way.