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Struggling to accurately calculate your renovation costs? In this blog post, we'll discuss the important topic of estimating renovation costs in real estate investing. From easy and expected fixes to major fixes and replacements, it can be intimidating.
That's why we've talked with experienced investors to bring you some of the top tips in the business. Learn how you can successfully navigate these difficult waters and turn that challenge into something you can start to easily estimate.
Insights from Ryan's First Renovation
To kick off this discussion, let's hear from Ryan, an experienced investor, who has completed nearly 400 deals and shares his insights on how he handled his very first one.
He admits that at the very beginning, he didn't even estimate rehab costs for the first deal. Instead, he locked up the property as low as possible and then threw it on the market like "fishing", hoping someone would bite. Fortunately, an investor came along and made their own rehab cost estimation, which worked out well in the end.
One of the keys to becoming successful at estimating renovation costs is doing that initial deal. The more you start to estimate the potential costs the easier it becomes. You can then use your experience to make more accurate estimates for future projects.
Estimating Rehab Costs Techniques from Jerry Norton
Jerry Norton is a well-known figure in the real estate investing space. While on an episode of the DealMachine Masterclass, he shared how he breakdown his rehab calculations. This is a bit different from what some investors use to calculate as it is a much simpler version. But, it does work most of the time for properties Jerry finds that are structurally sound and in "clean" condition. Here's how he approaches estimating renovation costs:
- Takes the Zestimate value from Zillow
- Combines it with three other estimates from Realtor.com (CoreLogic, and two other data companies)
- Averages the four values together
- Offers 60% of that average
Amazingly, Norton has stopped calculating renovation costs altogether, focusing instead on averaging these four values. Again, he believes that this simplified approach works as long as the property is in a "clean" condition, meaning it's structurally sound and not severely damaged.
Ryan's Rehab Estimation Strategy
Ryan uses a combination of strategies to estimate the rehab costs for renovating a property. But now he usually calculates home renovation costs by square footage. If it is in fairly good condition he expects that it will be around $20-30 per square foot. Then if it looks like it needs a lot of work or is in poor condition he bases his estimation on $65-70 per square foot.
Key Takeaways for Accurate Estimation
- Experience helps: Completing your first deal and knowing how much different aspects of a renovation cost is invaluable.
- Jerry Norton's method: Utilize multiple sources to get an average value for the property, then offer 60%.
- Know your potential profit: Calculating your offer price should factor in the after-repair value (ARV), repair costs, and wholesaling fee while leaving a 25-30% profit margin.
Common Mistakes and Tips for Success
It's important to remember that even experienced investors have made mistakes when estimating renovation costs. For example, our seasoned investor friend encountered difficulties when estimating rehab costs for a large multifamily property with multiple units needing repairs.
No matter how experienced you are or the tools you use, it's impossible to predict every expense accurately—especially when dealing with unforeseen issues that can arise during a renovation. That's why leaving a decent profit margin is crucial, as it can help absorb any unexpected expenses and still result in a successful project.
In summary, estimating renovation costs is a critical skill that real estate investors must develop. With experience, sound strategies, and an understanding of common mistakes, you can hone this skill and make better decisions in your investing journey. Good luck!