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Estimating A Rehab – Four More Pieces Of The Puzzle

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My previous post examined how to quickly estimate three major rehab components.  To further help you when estimating a rehab, in this post I will discuss how to quickly estimate four more basic rehab components – flooring, paint, bathroom tile and kitchens.

The components described in this post, while perhaps not as big as those in the previous one, are no less important.  Being able to quickly and accurately evaluate all parts of a potential rehab will put you ahead in the game.  The discussion below examines estimates for a basic interior rehab of a rental property.

Basic Flooring

Basic flooring generally refers to installing new flooring materials.  It includes carpet, laminate and ceramic tile, but it can also refer to refinishing hardwood.  A basic rule is to budget about $2 to $3 per square foot of flooring needed.  This price includes both material and labor.  Of course the materials you choose for your flooring will matter.  But many types of flooring are pretty inexpensive.  For example, I just bought some ceramic floor tile at one of those big box home stores for less than 40 cents a square foot.  So be sure to shop around

Paint

A gallon of paint will cover approximately 300 to 400 square feet.  You can use this standard to estimate how much paint you will need for a particular job.  On a 10’ x 10’ room with standard 8’ ceilings (320 square feet total, less doors and windows) a gallon may do it.  The actual paint is fairly inexpensive.  $20 a gallon or so will get you a decent quality product.  But it is not the materials that are the expense here, it is the labor.  A decent paint crew will cost you about about $2 per square foot.

Bathroom Tile

New bathroom tile can really make your rental property pop to perspective tenants.  Nothing grabs a potential tenant’s eye more that a fresh, clean bathroom.    Bathrooms however can be a bit more intricate and thus take more time to do.  Both the walls and floors often utilize materials that are more unique.  Wall tile for example use bullnose (rounded edge) and other specialty tile types.  Floor tiles may be small and hexagonal in shape.  Expect to pay about $3 to $4 per square foot of new tile installation in a bath, depending on the materials you choose.  I like standard, old style black and white tiles but square foot ceramic tiles can look quite good as well.

Kitchens

Kitchens can be as expensive as you want them to be.  You can easily spend five figures on a higher end kitchen.  In a rental property however, there is generally no need for that type of expense.  Cabinets and countertops make up the largest part of your budget here, but they do not have to be super expensive.   Unfinished wood cabinets will cost about $30 per linear foot.  Finished cabinets can be more than double at around $70 per square foot.  Of course if you go unfinished you have to think about the cost to finish them and the recurring costs of keeping them looking good as tenants move in and move out.

The choice of counter tops these days are wide ranging.  Laminate can run about $20 a linear foot.  Granite, which is very trendy these days is generally a lot higher but can be sometimes found at a decent price at some building discount stores.  Be aware with stone countertops of the added costs of cutting and installation.  Cutting granite is no easy task and may not always come very cheap.

Using the basic guidelines outlined above and in my previous post will help you get started with the estimation of any basic rehab project.  In future posts I will discuss other rehab costs that you need to account for and begin to put all of these various rehab components together.

The SmarterLandlording Podcast – The Deal Architect, with Pablo Pereyra

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“Creating a win/win is outdated.  Today it is all about structure.”

Download the MP3  Or, check out the SmarterLandlording Channel on iTunes

Materials we discussed.

Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant

Gary Kasparov:  How Life Imitates Chess: Making the Right Moves, from the Board to the Boardroom

Michael Porter:  On Competition

Smarterlandlording.com’s 21 Tenant Screening Red Flags.

Want To Contact Us?

Connect with Pablo at

Pa***@90*.realtors











You can find me at my blog, Smarterlandlording.com

And you can like my Facebook page too

Like the Intro Music?  Check out my good friends in the band Kitchens and Bathrooms (Kind of fits right!).  They write and play some awesome, original music from right here in Memphis, TN.

Quickly Estimate Three Major Rehab Components

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Rehabbing is a big part of a real estate investor’s business. After all, run down properties often offer profit potential. Accurately and quickly estimating rehab costs is an essential tool. In this post I want to go over how to quickly estimate three major rehab components, roofing, HVAC and electrical panel upgrades.

Rehabs Contain Many Components

Every major rehab will contain several major components and many smaller ones.  Some of these components can be estimated fairly quickly because there are established, industry wide standards.   Moving quickly with a rehab estimate towards making an offer is important because there is often another investor right behind you.

For the purposes of this post, I focus on the basic standards and materials used for single family and smaller multi-family properties on three major components.  In future posts, I will add to this component list and bring the components together.

Roofing

Every property needs a solid roof, but weather and time take their toll.  A new roof is often one of the more costly components of a rehab budget.  Estimating the cost of a new roof is not too difficult however.

The standard measurement to remember that is used in the roofing trade is the square.  A square is 100 square feet.  The cost to replace a square of roofing with average materials and labor is fairly standard.  You can of course get up on a roof and measure the actual square footage of the roof and then divide by 100 to find out the number of squares. But there is an easier way.

A quick rule of thumb for roofing is to budget about $2 for every square foot of interior space on the house.  Square footage can usually be looked up quickly on the internet.  Thus, if a house is 1,500 square feet, you can budget about $3,000 to replace the roof.  Of course there is usually some rotten wood and decking that needs to be replaced.  So adding on an extra $500 or so is not a bad idea.

As I said, this is only a quick rule of thumb.  Other factors such as pitch (or angle), height, the number of old shingle layers that need to be removed and the amounts of rotten wood can add to the cost.  But for a typical single-family family house the formula works fairly well.

HVAC

Most buyers and tenants today want modern conveniences.  One of those conveniences is central air conditioning.  Budgeting for the addition of a central heating and cooling unit is also fairly straightforward as there is a standard measurement that is used.  This measurement is the ton.

A ton of HVAC will usually cool about 600 square feet of space.  Each ton costs approximately $1,500 to install.  Again, using our 1,500 square foot house as an example, a 3 ton HVAC unit should adequately heat and cool the house.  Cost for complete installation, including all ductwork, vents, etc., is around $4,500.

Again, this is a general rule of thumb and connections to electricity and gas or ease of accessibility can affect the cost.

Electric Panel Upgrades

Many older homes were built before modern circuit breaker panels were used.  Fuse boxes were the norm and can still be found on many older homes.  Today it is often best to upgrade these fuse boxes to modern circuit breaker panels.  Modern appliances such as clothes dryers and central cooling demand it.

Upgrading a fuse panel to a circuit breaker panel is not very difficult or time consuming for the trained electrician, but it is a little costly.  Expect to pay around $1,500 for a new panel.  Keep in mind that the $1,500 applies to each panel.   So if you are looking at a duplex property where each unit has its own separate electric meter and panel, budget $3,000 to replace both.

The Big Three

These three items are some of the most common big ticket rehab items that can be fairly easily estimated.  Your local market may vary a bit and these prices are not from the folks you see advertised on the billboards all around town.  If you see something out of the ordinary or are not sure, get a trusted contractor to take a look.

Seeing Clear Through The First Deal Fog Of Excitement

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The first real estate deal is exciting but that excitement is also a hazard. The rush first deal excitement creates, creates situations that cost newbies money and leave a very bad taste for real estate. To avoid that, here are five things newbies should do to get through the first deal fog of excitement.

  1. Use A Written Contract – Do not do your first deal on a handshake. In fact, do not make any real estate deal on a handshake.  It is fine to negotiate through to a handshake, but be sure to finalize everything in writing.  If you do not, your deal and possibly some of your money may slip away.  Remember that without a written contract, there is no proof of your interest in the property.  There is nothing to stop the seller from shopping your deal around for a better offer.  It may be your word against theirs if some earnest money disappears and things can otherwise get very messy very quick.  Always use a basic written contract.
  2. Never Give The Seller The Earnest Money Deposit – Never, ever give the seller the earnest money deposit on a property. Instead your best is to use a qualified third party such as a mutually agreed upon closing attorney as an escrow agent to hold all of these sorts of funds.  Doing so will help to ensure that your money is returned to you if the deal is never finalized, which happens more often that you think.
  3. Do Not Make Any Repairs Before You Close – Making a repair or two may seem like a good idea. After all, you are just trying to not spend even more money on more repairs later on.  While this may sound good I do not advise it.  You just never know if the deal will truly close.  If it does not, you will likely have lost those funds.  I have seen this happen.  Do not make any repairs unless your lender requires it in order for you to get the loan.  Even then, it still worries me.
  4. Do Not Pay For Anything Until The Deal Is Finalized – There really is no reason to pay for anything prior to closing. This includes back taxes, liens and any other issue that may be associated with the property.   Every issue I have ever encountered was able to be handled at the closing table by my closing attorney.  Putting you money into a property before it closes is like throwing it in the toilet and not flushing.  You might be able to get it out, but it will not be fun.  Plus it is just too easy to slip, hit the handle and flush it away.
  5. Do Not Close Until You Get A Title Search – A title search is perhaps the most important thing you can do before purchasing a property. If you only do one thing, do a title search.  Imagine buying a property and fixing it up only to have a long, lost relative of the seller show up to claim ownership.  It does happen and it can happen to you.  Take the time and do it.

Get Through To Do It Again

Newbies often do not realize just how much they do not know.  They have also not been in the business long enough to develop that thick skin us more experienced investors have.  They are too trusting and thus easily taken advantage of, especially in the fog of excitement over their first deal.

By following the five items I have outlined above, the newbie real estate investor can go a long way towards protecting themselves and their hard earned funds.  Be careful and you will be successful.  If you get lost in the fog and lose money, you may never come out to try another deal again.

What Should A Newbie Investor Look For In A Realtor?

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Blogger’s Note – The son of a good friend of mine is looking to get started in real estate investing.  He would like to become a landlord and find properties that offer positive cashflow to replace his current income.  His goal is to ultimately become a full time real estate investor.  I have been giving him some advice as he tries to liftoff his real estate investing and I thought it would be interesting to share some of his newbie questions and my answers on this blog as I’m sure there are others out there who have the same questions.  I hope to publish more questions and answers in the future.  Look at the bottom of this post for more questions and answers in this Newbie Question and Answer series. 

Question: What should a newbie investor look for in a Realtor when starting out?

Answer: The heart of a teacher.   

To someone just starting out in real estate investing, the services of a Realtor can be very helpful.  A Realtor can act as a guide as they take the newbie through what can often be a very complicated real estate investing world.  When I was just starting out, I used a Realtor and found their advice and services invaluable.

But not all Realtors are built the same.  Realtors come in all shapes and sizes and just picking a Realtor at random will not do.  Instead, as a newbie, you need to find a Realtor that can and will help you achieve your investing goals.  And I think the most important quality for a Realtor to have at that stage is the heart of a teacher.

Newbies need teachers and guides.  They need people that want to help them and show them the way towards success.

But how do you find a Realtor who has the heart of a teacher?

It is no easy task.  There will be many Realtors out there who will tell you that they can help you, but not all can.  As I said, not all Realtors are built from the same cloth.  Some will be focused on retail buyers and others will be focused on specific areas.  These Realtors may be of little service to you.  In fact, they may actually hamper you.

Instead newbies need a Realtor that will take some time to get to know them and gauge their level of knowledge.  This person should be asking the newbie all sorts of questions.  Not just about their price range but about why they want to be a real estate investor.  They should be helping you think about your long term goals and offing to be part of the plan to get there.  You want to work with a Realtor who not only knows and understands the pros and the cons of real estate investing, but will also share that knowledge with you.

With those thoughts in mind, newbies should seek out a Realtor who has been in the business for a while.  Seek out someone with a good track record.  Look for someone who has or currently owns similar types of investments.  Run away from anyone who is too focused on their commission or is more interested in getting you signing something than talking to you.  Of course Realtors should be paid for their efforts and advice as they often will exert loads of effort.  But those things will naturally come later, not first.

If you use a Realtor, how did you find that person?  What qualities would you look for in a Realtor if you were just starting out again?  Please share with your comments.

Other posts in this Newbie Question and Answer Series

Is Your Real Estate Market A Good Place To Start?

How Do You Know You Picked The Right Tenant?

When Writing A Purchase Contract, Do I Need A Lawyer?

When A Bad Tenant Needs A Reference

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Remember that tenant who skipped out in the middle of the night owing you rent?  Of course you do.  We always remember the bad ones.  Your thoughts at the time likely consisted of anger and frustrated revenge.  I say frustrated because the tenant seemed long gone.  However things always tend to come back around.  Former tenants, even the bad ones, often need a reference.  While revenge can be tempting and sweet, what is the best way to handle the situation?  What is the best policy when a bad tenant needs a reference?

If you stay in this landlording business long enough, you will get a bad tenant or two.  No screening system is perfect and sometimes tenants just go bad.  If you continue to stay in the business, you will find that many of these tenants eventually pop back up again and actually seek your assistance.  They pop back up after several years because they need to explain a gap in their housing history.  They may be trying to rent another home or get a loan of some type.  No matter the reason, someone, somewhere is asking them something they cannot explain away.

When you hear your former tenant’s name it instantly rings a bell.  Both because you remember the sting and you have been waiting for this day.  You cannot wait to get on the phone and share all of the juicy details.  Your thoughts turn to how sweet revenge is going to be.  But before you do speak, before you over indulge in that sweetness, I want to stop you.  I want you wait just a few moments more and think about what you are doing.  Because if you do it wrong, it could come back around to you.

Stop and remember that we live in a litigious society, and anything you say or do can be used against you.  Yes, I know that former tenant screwed you over, but what you say now could hurt you even worse.  You need to play things safe here.  If you do, you will get your revenge and protect yourself from further damage as well.

How do you do that?

You do it by being professional and by sticking to the facts.  I am not telling you to not say anything about past events.  That would be unfair to whoever is currently asking and to you.  Plus, there should after all be repercussions for past actions.

What I am telling you is to act and sound like the professional landlord you are.  I know it is tempting but please do not fly off the handle with accusations and name calling.  Instead, relax and take a look at your files.  Explain exactly what happened.  Be calm, cool and collected.  Use phrases such as:

“Mr. Former Tenant was late 4 times with his rent.”

“Mr. Former Tenant left owing $1,000.”

“Mr. Former Tenant was evicted by our company on June 10, 2015.”

Just the facts as Joe Friday on Dragnet would say.  By remaining composed and by sticking to the facts, you limit your exposure.  No name calling.  No long winded rants.  Just the facts, just the way it happened.

If you want to put a bit of icing on the cake say the following:

“No, I would not rent to this person again.”

Quick, simple and factual statements like these say a lot.  Anyone on the other end of the phone should grasp your meaning.  They will also appreciate your calm and cool manner.  Now sit back and wish you could be a fly on the wall in whatever meeting your former tenant is in.  The look on their face is probably priceless.

Have a good story about getting back at a former bad tenant?  Please share below.

Rents On The Rise In Memphis Tennessee

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Rents are on the rise in Memphis Tennessee and have been for a while now.  This article from the Commercial Appeal examines the rental market here in Memphis and compares it to other areas in Tennessee and the United States.

If you invest or plan to invest in residential real estate in Memphis, check it out.

To find out more about what other areas in the United States are experiencing, this article on what the rent did in 2018 provides an overview.

 

What Did Rents Do In Your Market In 2018?

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What did rents do in your market in 2018?

In many markets landlords were able to raise the rent in 2018.

Were you able to do so as well?  Click here to read more.

What did rents do in your area?  Were you able to increase them, hold steady or did you have to decrease them to find tenants?   Please share your personal experience with a comment.

 

Increasing Profit Potential Through Standardization

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Nearly every property I have purchased required an extensive rehab.  Rehabs are complicated and no two are ever the same, making them perhaps the most difficult and costly aspect of this business.  Adding value through a rehab, despite the difficulty and cost, makes these properties profitable to us.  But, our goal as investors and entrepreneurs is not to just do a rehab for profit; it is to run an efficient business that increases the potential for making a profit.  Increasing profit potential through standardization, especially rehabs, is one way to do that.

Standardization helps to reduce the difficulties and the costs of doing a rehab.  All businesses should strive to standardize their processes, to streamline and make things as repetitive as possible.  Standardized and streamlined processes save valuable time, and time as they say is money.  Use time wisely and the reward will be more money in your pocket.

The Perfect Example

McDonald’s is a perfect example to use.  McDonald’s was my first “real” job and before they let me do anything, I had to go through training.  I watched videos, read manuals and followed checklists on how a hamburger patty was to be properly grilled.  I had to learn the exact amounts of lettuce, pickle, etc. that went on a Big Mac.  Everything was spelled out in detail so the process of making a Big Mac could be repeated over and over, not just at the restaurant where I worked, but also in Chicago, Memphis, Paris, Tokyo, wherever.  It was this standardization that in part made McDonald’s so successful.

Rehabs are not Big Macs however so they are much more difficult to standardize.  This difficulty stems from the facts that every property is different and needs differing amounts and types of repairs.  Throw in the turn of the last century construction that is common in my market and rehabs become even more complicated.  Despite my best efforts, every time I do a rehab job there is a new issue that gets overlooked because of these differing factors.

Keys To Standardization

One key towards standardization is the use of materials.  Just as McDonald’s uses the same pickles over and over, we real estate investors can use the same paint colors, ceramic tile, plumbing hardware or ceiling fans over and over.  Doing so will lessen difficulties at the property in the future and left over materials can be used on the next project to reduce waste.

Another key to standardization and thus a more streamlined business is the use of checklists.  A checklist assists in ensuring that the same standardized materials and processes are used and repeated.  Checklists help guarantee that easily overlooked items are not.  They are also valuable tools to keep you on track and within budget.

Without standardization and checklists too much is left up to chance.  The chance of you forgetting something is high.  The chance that you will spend more on materials than is necessary is also high.   Your contractors will miss things as well.  There are just too many moving parts in a major rehab.

It Always Evolves

Standardization and checklists in the real estate business are constantly evolving.  The differences in properties will always ensure that, as will the desired outcome of acquiring the property.  The rehabs for your buy and hold properties will likely be very different from the rehabs for properties you wish to resell on the retail market.    This however does not mean that standardization cannot be done; just that it is an ever changing process.  Checklists for example are never set in stone, but are constantly revised as new problems are raised or as new processes and products make things easier.

I’ll talk more about what I do to standardize things in my business and some of the things I have experienced in future posts.  For now, if you have not before, take this opportunity at the beginning of the New Year to begin to think about what can be standardized in your real estate business.  Start making lists and keeping track of what it is you do.  Knowing where you are now is the first step towards moving things forward.

What have you been able to standardize in your real estate business?  Was it materials, property inspection procedures or even just how the phone is answered?  How has this helped you’re your business more profitable and manageable?  Please add to the discussion with your comments.

What Is On The Road Ahead For Real Estate In 2019?

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Happy New Year!

I hope everyone had a great holiday season and is looking forward to 2019.  The beginning of a new year provides us with the opportunity to look at where real estate is going.  Real estate continued to do well for many of us investors in 2018, but not without some challenges.  Will we see the same in 2019?  What is on the road ahead for real estate in 2019? Here are some thoughts.

Real Estate Investing Will Continue To Become More Concentrated and Centralized

The real estate investing industry is becoming more and more concentrated and centralized.  Websites such as Zillow and Roofstock along with turnkey investment companies in many major cities and hedgefunds are redefining the business and bringing new resources to the industry.  These factors will make it more difficult and perhaps more expensive for smaller and beginning investors to get into the business.  It will be harder to find deals with expanded resources chasing them.  Finding and keeping good help will be more difficult as demand for their services grow.  It will also be more difficult to “go it alone” as everyone utilizes the new services this competition will bring.  These changes will require us smaller “mom and pop” operations to develop new strategies if we wish to remain competitive and grow.

Anti-Landlord and Anti-Investor Sentiment Will Continue To Rise

Anti-landlord and anti-investor sentiments will continue to rise and develop.  These sentiments could be especially forceful if real estate prices and rents continue to rise.   Plus a swing to the left is possible as a reaction to the current state of the country.  There will be misguided calls for rent controls, landlord registrations and other acts that will make our lives and the ability to conduct and enter the business more difficult.

Now Is A Great Time To Sell Real Estate

Perhaps in part because of these potential challenges and difficulties I describe above, now is the time to sell your real estate if you wish to do so.  Buyers have the money to buy and inventory seems to have been declining.  In many areas sellers can almost name their price as there are so many buyers chasing whatever becomes available on the market.  This situation will not last.  In fact, it may start to disappear sometime during 2019.  Will there be as hard of a fall as there was in 2008?  It is hard to say.   But if you do not take this opportunity now you may have to wait another 10 years for a similar opportunity.

The Real Estate Market Will Adjust

Developers in many locations have been scrambling to meet the increased demand for real estate.  Higher prices and higher rents have incentivized entrepreneurs to respond.  The numbers of new construction projects, especially apartment projects has been astounding.  All of this new supply will eventually come online and likely push down prices and rents.  Again, the time to sell is now.

Real Estate Will Continue To Be A Wise Choice

Real estate will continue to be a wise choice in 2019.  Yes, there might be some pain and readjustment as markets shift and clear or new laws are enacted but the eventual outcome is usually good if you can hold on.  Real estate is and will still be a valuable investment.  The players may change, the way things are done may change and prices may change, but change is part of the process and change creates opportunity for those who can see it and adjust to it.  Despite what the naysayers say, remember that real estate is tangible.  It cannot be created by the stroke of a pen or keystroke on a computer.  Plus, they are not making any more of it.  Barring a major war or catastrophe, good properties will offer good returns.

If you are looking to get started in real estate investing, 2019 may be the year for you to do it.  Challenges will be out there but so will opportunities.  Know your market and begin to gather information.  Sign up to smarterlandlording.com and let’s have a Happy Real Estate New Year!