Projecting rehab costs

6 Replies

Hi BP,

I'm a hopeful investor who is still learning a lot about REI. My latest quest is to figure out a quick and easy way to estimate rehab costs and ARV by just looking at the specs and pictures of a house online. Obviously, I know a lot could change when I get in the house with a contractor, but I'd like to figure out a way to decipher if the house is even worth pursuing in the first place.

In my research, I came across a flipper online who provided me the following chart. This flipper was a former construction worker who has flipped over 100 houses and swears by this chart for initial rehab costs. He is based out of Arizona and I am trying to figure out if these numbers would hold true is my area (Philadelphia and Delaware County) as well. Can anyone tell me, especially if you’re from the Philly area, if these numbers look about right?

Calculating Reno Budget

Light = carpet/paint

Medium = carpet/paint/kitchen/bath

Heavy = complete gut job

Square Feet

<1500 1500-2500 2500-350 3500-4500

LIGHT $10k $15k $25k $30k

MEDIUM $25k $35k $45k $55k

HEAVY $50k $75k $90k $100k

Light $10k (<1500 sqft) / $15k (1500-2500sqft) / $25k (2500-3500sqft) / $30k (30500-4500sqft)

Medium $25k (<1500 sqft) / $35k (1500-2500sqft) / $45k (2500-3500sqft) / $55k (30500-4500sqft)

Light $50k (<1500 sqft) / $75k (1500-2500sqft) / $90k (2500-3500sqft) / $1000k (30500-4500sqft)

@Jason Polykoff for rent ready, very basic, I would say these sound light.  A small-ish kitchen: new cabinets, laminate counters, floors, 4 piece appliance cost me close to $20k alone. If paint is entire interior, including trim, I pay 5-6k for roughly 1400 sq ft of living and a floor and wall spray in basement to clean it up.  For a very, very rough ballpark, I would say at $10k to everything you list, but even then a medium rehab in pictures could be full gut, which doubles your rehab budget.

That being said, and getting to your initial question, I have never found a good way to estimate prior to walking the property.  Pictures hide A LOT, i.e. full repaint can look fine in pictures.  But beyond that, the biggest ticket items cannot be reviewed in pictures.  Roof condition, mechanical condition, plumbing issues, appliances, foundation, structure, overall flow and usefulness of layout and spaces.  

Originally posted by @Jason Polykoff :

Light $10k (<1500 sqft) / $15k (1500-2500sqft) / $25k (2500-3500sqft) / $30k (30500-4500sqft)

Medium $25k (<1500 sqft) / $35k (1500-2500sqft) / $45k (2500-3500sqft) / $55k (30500-4500sqft)

Light $50k (<1500 sqft) / $75k (1500-2500sqft) / $90k (2500-3500sqft) / $1000k (30500-4500sqft)

Looking at what I assume is supposed to be "heavy" since you have "light" listed twice, not likely. At $50k for 1500 sq ft for a "heavy" rehab you're at $33/ft. Ignoring the fact that Philadelphia is one of the more expensive markets to build in, you have to remember that our housing stock is very old and very neglected. AZ is probably a bunch of newer ranchers that are paint, carpet, drywall, and kitchen/bath rehabs for the most part (I'm guessing). The least I've spent, using a friends dedicated crew that does the lower income rehabs all day every day, was around $40k on a 900 sq ft 3/1 and it was a no frills rehab, very low end, no electrical but did replace boiler (no a/c in the house) and redid kitchen, bath, patched the roof, new gutters, flooring, paint, and some windows. I replaced a fence and concrete patio out back but that was additional work I subbed out through laborer types. 

In my mind, "heavy" rehab means you're gutting the place and potentially some minor structural repairs as well. I'd guess you'll be at least $80/ft for that type of rehab (honestly more but being generous here). Looking at the "light" rehab numbers, they're at ~$6/ft. for 1500 sq ft, which is large-ish for a Philly rowhome. Flooring alone for cheap LVT installed is going to run you $2-$3/ft. and that doesn't have money for someone to rip it out and dispose of it. Hopefully some others with more direct experience can help out but these numbers seem way too low. 

 

@Evan Polaski Evan, this is great feedback, thank you! I had a feeling the numbers were a little low, but as a new investor who has never flipped a property, I didn’t want to make assumptions.

Let me ask you, when you come across a potential deal that involves reno, what number pops into your head in order to run quick numbers to see if the deal if worth it?

I know that every case is different, but assume you saw a house listed at $100k, that's 2 bed 1 bath and 1200 sqft. You run the comps and the ARV is $160k. Are you assuming a reno cost in that situation of a certain number (e.g. $30k) that would make this a good deal? Or does this peak your interest and cause you to walk through the property to find a real reno estimation?

I ask, because I’m finding what I assume to be good value purchases online, but because I don’t know how to evaluate reno costs, I don’t know if they truly are good deal. In that situation above, if the reno costs were actually $75k, then Its not as good of a deal as I originally assumed. Am I making sense?

@Jason Polykoff : I look at it a couple ways. First, I want to feel like there is at least $30k profit in any deal, regardless of overall investment size. If that number doesn't seem close to feasible I won't go any further. Since I make as is, no contingency offers, I want that buffer just in case. For example, if a sewer pipe ends up needing replaced that can easily be $20k, so I want to have a buffer to cover that without losing money (flip) or being upside down (BRRRR)

Beyond that, I am also looking to make 25%+ return on investment, using ARV. With a BRRRR, you will likely want more buffer, because I have never had a refi appraisal come back at the value I wanted, yet my flips will often go over ask, so I am not being overly confident in ARVs.

Finally, I do get a general estimate of budget in mind from looking at pictures.  But I am making ball park estimates knowing what I typically spend, and how much that costs PSF.  Starting out, I could make some general guesses from my own experiences as a home owner, but I had to see the property and often walked it with a contractor friend to get a sense of cost.  And there were many that I spent time walking, that seemed okay from pictures that were way worse in person, and I passed on those.

Being new, I would spend time walking as many properties as feasible.  This will teach you what the power of good lighting, a wide angle lens, and strategic angles can do for photos versus reality.  If you have a friend that knows construction that will walk some with you, even better.  Thankfully, touring properties is free (other than some time and mileage on your car).