The Four Pillars of Rehab Project Costs

When buying an investment property using a hard money loan, you can’t simply think about the worth of your investment property. You have to consider other factors that can drive up the total project cost and make or break your investment. Here are the four pillars of the cost of a rehab project.

The first pillar is the purchase price.

This is the actual amount you have offered to pay the seller, which may be different from the asking price. It is also important to remember that this may also not be the actual worth or the market price of the property. Purchase price is largely the result of negotiations between buyer and seller. The old saying remains: You make your money when you buy. If, as a real estate investor, you are not able to negotiate the appropriate discount, you are starting at the significant disadvantage. Hoping that the real estate market moves up or your can save on renovation costs or you can turn the whole projectt around in the record time are all the signs of immaturity in real estate investing.

This is why it’s important to pace yourself when negotiating and buying your next real estate investment. Getting a good deal will not happen instantaneously. The other investors might outbid you. The renovation could be more complex than you initially anticipated. You might discover the hidden title defects. Take your time to conduct due diligence before committing yourself.

The second pillar is estimated repairs.

This is a huge and often complicated math problem. Here is where planning and accounting become critical. Materials, labor, permits, etc. can have rehab prices spinning out of control. It goes without saying that having the right contractor can help you forgo a lot of the challenges associated with these costs.

The main responsibility of your contractor is to provide the accurate cost estimate. Bear in mind that many contractors will intentially lower their bid to win your business and hit you with change orderes later on. Unless you have direct experience of working with that contractor in the past, always take their estimate sceptically. Depending on the project, add a 5% to 10% safety buffer to their cost to allow to the anticipated expenses. For more information on how to manage your contractor (and the renovation costs) effectively, read our blog on working with rehab contractors: what not to do

The third pillar is time.

Time is money. If you’re a real estate investor flipping homes for living, you probably know that more than anyone else. Once you sign the closing documents at settement, you are responsible for paying taxes, utilities, and homeowner’s association fees. You are expected to maintain a proper insurance on your investment property. Above all, you are responsible for making payments to your private hard money lender. Long story short – if you are fixing the house to sell it (aka fix-and-flip), every penny you pay for all those expenses is coming out of your profits. These costs are called the carrying costs of your loan. The longer you hold your private loan, the higher these carrying costs will be. In contrast, the faster you can fix and turn over the property, the higher your rate of return on the money you invest.

How fast you can repay your hard money loan depends on many factors. Among them are the complexity of your renovation project, the real estate market conditions and pure luck. To learn more about carrying costs and how to property caclulate them for a specific project, check out our hard money calculator.

The forth pillar is transactional costs associated with your project.

Transactional costs include real estate commissions, title company fees, trasfer taxes, recording fees and costs associated with obtaining financing for your investment property. They are a cost of doing business, but you need to know them in advance and plan accordingly. Aslo bear in mind, that you will incur transactional costs on both ends of the transaction – when you are buying AND when you are selling your investment property. Even if you strategy is buy-and-hold, you will incur transactional costs when refinancing your hard money loan with another lender.

The bottom line is that to take a realistic look at the total cost of your project you need to know what these costs are. Some of these costs you can avoid, others you can’t. When working on a rehab using a hard money loan, always plan for unexpected repairs and delays. Do your best to avoid them, but plan for them. As my mother used to tell me, measure twice, cut once.

New Funding Resources LLC is a top private lender in the DC area. Our private hard money loan programs are fast, flexible and designed to help you compete with all-cash investors. To finance your next rehab project, please apply online or call us at 240.436.2340.