One of the most common questions I get from new real estate investors is: How do you know how much it will cost to renovate a property to either flip, rent, or for their own home?
Learning how to wrap your head around a construction project and come up with an accurate budget is a critical skill in value add real estate investing and a cornerstone in being able to successfully pull off forced appreciation. The best way I know how to do this is to look at the big picture and then systematically break it down to all the components required. Then once I get a list of all the components of the job required, either getting bids on the work or estimating using per unit costs.
When I first started, I used to think I could walk a house, and think well this is a cosmetic rehab on a 2 bedroom 1000sqft house, it will likely be 30k. This is not the case though. The scope of work required from one house to another varies so much based on what needs done and their scale.
Step 1: Walk the Jobsite
The first step is to get your bearings on the project. You will want to take photos, maybe a walkthrough video, and get measurements. On the first few projects you estimate, do not feel bad if you have to return to the jobsite to get more details and measurements.
If you do not have much experience with construction, it will be good to either walk the jobsite with a contractor, home inspector, or investor with lots of experience in the type of rehab you are estimating.
Step 2: Break Down the Work
I have found that the best way to do this is to work through the project linearly through time. Working through the process of construction, write a breakdown of the basics of what you will be doing in each step.
The first step to think about is demolition. What old materials are going to have to go away to complete the rehab you have envisioned. You might write something like "remove all carpet, cabinets, plumbing and electric fixtures." Working from demolition, you then move into framing, trades, insulation, then drywall, paint, finish trim etc. Tackle each one with a short description of the work that needs to be done.
Step 2: Scope the work
So now you have a list of what you want to do in each category. Such as replacing roof, replacing windows, replacing kitchen cabinets. At this point, it is somewhat high level. This is the point where we will start drilling down to more specific finishes and quantities.
For instance, you might have a line that says replace windows. This is the time to drill down and answer the questions about each item. What kind of windows? Vinyl replacement? Do they have white exterior or painted exterior? Or are you adding aluminum clad or casement windows? Then, how many of these windows are you replacing?
For carpet you are going to want to know the square footage, what pad you plan on using, and what type of carpet. You can get away with not having the exact sku in this stage, but maybe call out low-end, mid-range, high-end so long as you will know what that means to you in the estimating phase.
There are items that can be scoped in multiple ways. For instance, paint you could say it is 8 rooms to be painted, 1500sqft of floorspace, or you can calculate out the wall area. If you have drawings on the project, calculating the wall area can be much more precise for estimating how many gallons of paint will be required. For most projects, this will likely be too much detail though. As you work through a few budgets, you will start to find a middle ground of detail that works for you.
Step 3: Start Estimating
So now you should have a list of trades and a list of what needs done to complete the work. For instance you might have:
Flooring: Remove existing carpet and install nail down pre-finished hardwood in dining room, kitchen, and living room. 600sqft
You will need to estimate both labor and material costs for this part of the project. To estimate labor you can start calling flooring subs and see what they charge per square foot, or you can look online for averages per square foot if you are looking to get more of a ballpark at this time.
Then to get material costs, you can search for a pre-finished hardwood at a big box store and get the per square foot price. Add in a waste factor, likely 10-20%. Usually in the scenario of nail down flooring, the sub supplies the nails. It is worth researching all the materials required for each line of the scope of work.
The counts, square footage, linear feet, etc. used when creating the scope of work are essential in this stage.
This process will take a tremendous amount of time the first few times you go through it. Once you start getting used to some of the costs, you will be able to re-use some work you have already done.
Step 4: Putting it all Together
Some people prefer to write the scope of work out in sentence and paragraph format. Some people prefer to keep it in a spreadsheet. If you used a spreadsheet, you can add columns for labor, material, and total estimate. If you created it in paragraph format, you will need to convert it into a spreadsheet line by line first.
I mostly work in a single spreadsheet and then on complicated line items I link to a secondary supporting worksheet that has further breakdowns and descriptions of the work.
Here is a snippet of a spreadsheet that I have used to estimate rehab costs:
This spreadsheet is pretty much a list of all the items you typically come across in a residential remodel. I usually work through it by highlighting the areas in green that I am confident in either by getting a bid or getting precise with specification.
Takeoff software can help you be more accurate and faster when estimating rehab costs. If you are hiring an architect or designer to make a set of plans for this project, you can use these plans in takeoff software to get a better estimation of the scope of each task.
A tool that I use for this is called Stack. It runs in your web browser and is very easy to use. There are both free and paid versions of this software. With the paid version, you can set it up so it gives you estimates on material and labor based off of the "assemblies" you add to a specific takeoff. The free version is great for measuring square footage, getting linear ft of walls etc. It is enough to then be able to plug into your own calculations to figure out things like wall area, how many boards or drywall are needed, etc.
If this is a big project where you are going to have plans made by an architect or designer, typically it is best to run the numbers before you have the plans. Then once you have the plans finalized, go through the process again with the specific items that are called out in the plans. This way you are less surprised by the costs you come up with after paying money for plans.
One of the critical roles of a real estate investor is being able to estimate rehab costs. While the task may seem daunting at first, the best way to deal with it is to break it down into smaller pieces. Then after it is broken down, dive into what is required for each portion of the job by scoping out the work. Then once you have it scoped out, you can start estimating what each unit will cost. Once you have the costs estimated you can put it all together into a budget for the renovation.