Rules of Thumb for Determining Repair Costs on Investment PropertiesReading Time: 13 minutes
One of the biggest mistakes an investor can make is underestimating repair costs for an investment property. Seasoned investor, Kenn Sok, joined us to explain in detail how to estimate rehab repairs correctly every time.
Whether you’re a wholesaler working with motivated sellers, or an investor dealing with a wholesaler, these rules of thumb for determining repair costs on investment property deals is a must-read.
What do you do when you see a house for the first time?
I’ll say that it actually starts before that. It starts with the phone call. When you’re talking to a seller, you want to figure out first what are the big ticket items.
First, ask them if they have any foundation issues. A lot of times they’ll know—right off the bat they’ll say, yeah I see some cracks. A lot of times they’ll let you know they had somebody come out to fix the foundation, and a lot of times those foundation repairs have transferable warranties. You’ll want to verify that when you get to the house.
Next, ask them about the roof.
If they have these issues (foundation and/or roof), you know that these are going to cost a lot of money.
Generally, on a standard house (between 1,000-2,000 square feet) you’ll spend about $4k-$6k or so depending on how many floors the house has, how much it needs to be raised, and what the square footage is.
Ask how old the roof is. They may know, or they may not. The better question is when was the last time the roof was replaced? Then they can say, Oh, I bought this back in ’98 and I replaced it two years ago. If they do replace it, great. If they didn’t replace it, you can still ask the question: Is this a 15, a 20 or a 30 year roof?
A 20 year roof generally has a lifetime of about 15 to 17 years. A 30 year roof has anywhere from 22 to 25. If they don’t know that answer, and if it’s greater than ten years, you’re probably going to have to consider a roof replacement. It’s just something to keep in mind for when you go to the house. The timing of the replacement depends on your exit strategy.
If you’re going to rehab it and you can see that the roof needs work, then you’ll probably have to replace it. If it’s a rental, then you’ve probably still got a couple years out of the roof.
So, foundation and roof are first. A/C unit is the third big potential repair.
Air Conditioning Unit
First ask if the house has central air or window units. If it has window units, ask how old the units are. Those things are $200-$300, so you can easily replace them.
If you need to completely install central air, then that could be a big ticket item. Again, it goes back to your exit strategy. If you’re renting it out, then you can probably just replace the window units. If you’re going to rehab it, see if it makes sense in that neighborhood to replace the central air or not.
Replacing the unit would definitely increase the after repair value or rental value, even if it’s not in a great neighborhood. It will make it stand out if the other houses in the neighborhood don’t have central air. It costs anywhere from $2,000-$5,000 to do that. Maybe even more, depending on the size of the house.
Those are your three big ticket items: roof, A/C, foundation.
Another question I ask on the phone is, Would you say your house is in great condition, good condition or does it need some work?
More often than not, it’s worse than whatever they say. If they say it’s in great condition, it’s probably in good condition and needs some work. If they say it’s in bad condition, then you already know right off the bat… Aw, this thing is going to be a beater.
Be realistic about it—everybody thinks their house is nicer than it actually is. Using these terms just gives you a ballpark.
Notice that my question is very specific. You don’t want to ask if the house is ugly or damaged, because you want to show as much respect as possible. Try to get information without being offensive.
Does your question change if you’re talking to an investor as opposed to a motivated seller?
If you’re talking to the seller, you’re trying to buy their house. You’re trying to appeal to their senses, so yes. You want to be polite about it and not offend them, because they are probably in a difficult situation already.
With an investor, you can be more specific. How many repairs do you think it’s going to need? What’s the condition of this, what’s the condition of that?
You can ask similar questions, but be more matter of fact with an investor. More often than not, an investor will be forthcoming because they have no emotional ties to the house. They already know it’s an ugly house, and they want to sell it for the most that they can.
Price per Square Foot for Repairs
I also use those three descriptions (great, good, needs some work) because it gives you a good indication of the total repair cost.
If it’s in good shape, then you know you’re looking at $5 a square foot. If it’s in great shape, it probably still needs $5 per square foot because you’re always going to need carpet, paint, a little bit of this, a little bit of that. Some houses don’t need anything—it’s fantastic. Those are rare in my experience. They rarely happen. That’s practically a turnkey property, so you pay a premium.
If it’s a good house, you’re probably looking at $10 a square foot. Again, this is just rule of thumb. You haven’t even looked at the house yet. You’re coming up with the numbers because you need to know what the numbers are before you walk into the house and look at it.
When you walk into the house, all you’re doing is verifying your assumptions. I assume that because he said that this is a good house, it’s going to need some things, but not a lot of things. It may need a new roof, but A/C and foundation are good—anywhere from $10 to $12 a square foot.
If they say it’s in bad shape then already you’re looking at about $15 to $20 a square foot. So a 1,000 square foot house is already $15,000 to $20,000 to repair if they say it’s in bad shape. That’s a minimum. That doesn’t even include the big ticket items that I mentioned: roof, A/C, foundation.
Once you get to that point, you have at least a basic understanding of what the seller sees and can make some general assumptions. I sometimes ask other questions. How’s the kitchen? How are the bathrooms, have you done any replacements, have you done any rehabs? What kind of floors do you have? Are they wood floor, are they carpet?
A lot of that is nice to have but it’s really just conversation, just to let them know you’re legit. You’re trying to get more information out of the seller to help justify your assumptions.
Using Google Street View
You can also look online as well. When you look on Google Maps and you do a street view, you can look and see what other houses in the area look like as well. A lot of times, how the front of the house looks is a good indication of how the inside of the house looks. If the front of the house looks beat up, more than likely the inside of the house is beat up. If the front of the house looks pretty good, then the inside is probably pretty good too because it’s a reflection of how the homeowner takes care of the house. If they take the time to take care of the outside, they’re probably taking care of the inside too. That’s just a little seller’s psychology.
Visit the Property
Outside the House
Then you actually go to the house. Everybody does it a different method in terms of how they walk the house.
I like to start with the outside. I walk around the perimeter to see what’s going on. That’s where I check the foundation. Maybe they don’t even know about foundation issues until I point it out.
If you see cracks in the house, take a look at how big they are and how far they spread. Did it happen quickly (you can see it right through the brick) or did it happen slowly over time (where you follow where the grout is).
I say vertical and horizontal, but really you’re looking at the brick. If you see a crack through the brick, let’s say there are bricks like this, and you see a crack right through the center of the brick or through a side of the brick or something like that, that’s where that foundation shift has happened.
If you see cracks on the outside,verify on the inside. Even though you see cracks on the outside, look at doors, the frames and windows on the inside. If you’re seeing stress cracks at the door frames, that’s a really quick indicator. That’s foundation issue right there.
Feel the floor when you’re walking through the house. Is there a shifting area? If I put a ball here is it going to roll somewhere?
The difficult thing about foundation issues is that it’s hard to provide repair estimates without some experience. I would recommend as an investor to always get a foundation repair estimate.
It’s also a useful bargaining tool with the seller. Sometimes they don’t know, but more often than not they do.
For the roof, you’re going to be looking for leaking. Look for water spots around the ceiling. It’s usually a darkened patch, especially if it’s sheetrock.
Inside the House
Once you go inside the house, start verifying all the things you thought. If you’re a new investor, consider bringing a more experienced investor along.
You could bring a contractor or something like that, but again, the rule of thumb is going back to your original question of the condition of the house. That price of repair per square foot goes up or down depending on the quality of upgrade that you want to do and the neighborhood that you’re in.
What is one of the weirdest things you’ve ever seen while inspecting a house?
People do weird stuff to their houses for sure. Like they think, oh yeah, I’m a handyman. I can fix this, they can’t. Nine times out of ten they cannot fix it. They do all sorts of weird dinky things. You’re like what were you thinking. You don’t say it to their face but you look at it and you’re thinking, oh my God, what did you do?
This is one that I bought for myself and this is actually one of my favorite houses too. It was the third one that I bought.
It was a three bedroom house, two bathrooms. They converted two of the bedrooms into one giant bedroom for the master. They basically they tore down the middle wall. Then instead of just using the entire space, they put another wall up, right in between. They turned the entrance to the second bedroom into a closet.
They built another wall, so then the master bedroom and the second bedroom was this giant space.
They also decided it would be a good idea to tear down the wall for the bathroom. So this way you could have a bathtub with two entrances. (Why???)
They tore down that closet to move all the things over to the other closet, so they expanded that large closet. You could see shower curtains on both sides, and you could get in from both ways. It wasn’t even like a big bathtub, it was just a regular standard size bathtub.
When we took over, then we just put that wall back up and turned it back into a normal bathroom. Then we built up the wall separating the master bedroom and that second bedroom and turned it back into a 3/2. Just the entire time I’m thinking, what the heck.
That was one of the weird ones. I bought the house because I love the house. It was a great neighborhood.
How do strange modifications affect your repair estimate?
It depends on how bad it is and if it is it a rental or a rehab. If it’s a rehab you have to make it as good as possible, so that’s got to go.
If you’re not going to fix it, market it as a feature of the house.
We have another house that we bought. Normally in that neighborhood, there’s a house and a detached garage with a cover in between—inside of which there’s just open space. It’s basically a covered, detached garage that you can go to with a walkway.
This particular seller decided to wall that section off so this way you could walk underneath, and basically created another room. The problem is that they used crappy flooring… They just threw plywood on top of it and covered it with weird, fake sticky tiles that were coming up because water was getting underneath. Also, the walls of this particular room were just the shingles of the house. It just looked really bad, but for us to tear it down it didn’t make sense. All we did was just paint it and made it look nice.
If it wasn’t a rental we would have done more to it, but because it was a rental we said…You know what? This really ugly but this is not a weakness. Our house is one of the only houses that you can get from your house to the car without getting wet in the rain.
We fixed it up a little bit, made it presentable and sold it as a feature!
That’s one of the best parts, you get to be creative. I look at a hideous house and I think, How can I make it better? How can I make it a better house into something that somebody would actually want to live in?
What do you usually do for your rehabs? Do you have a construction crew that pretty consistent or do you ever use turnkey companies?
I’ve done both. I’ve rehabbed one house all together myself with the help of my partner, my dad and a contractor. We did the house entirely ourselves. I don’t take any credit because it was mainly the other people who were doing it. I came in as much as I could and did as much of the work as I could. That one is the one that I’m talking about with the weird configuration that we changed it back up. That house came out beautiful.
Was it cheaper? Yes. Time intensive? Yes. Much more headache? Yes, but at the same time there’s a lot of love. I know where every outlet in that house is. I know where every little thing is, more than my own house.
I worked with one contractor who we used for two houses, but I regretted it because they were cheaper, and they were a family friend. The quality of work was not there.
Then we went with another house, one of the houses we had to do a complete rehab on. That one we went with one of those turnkey providers. Actually, I’ll plug them: Fast Track Remodeling.
They are amazing. I think in the future now I will mainly just be using them, or just be using a contractor like them. You pay more, yes, but you’re getting it done faster and you don’t have to worry about the work.
You’re paying for peace of mind just to know that it’s done and it’s done right.
But to each their own. Some people like to do that, and some people don’t. It’s like that’s a great thing too, with real estate you can choose your own path how you want to do it.
There’s no right or wrong way. At the end of the day, did you make money? That’s what matters.