How to Estimate Your Renovations Costs Accurately

When we evaluate a transaction, we look at several numbers. Each is equally important, and together, they determine how much profit our borrower will make. The first two numbers are the property prices: the price you are paying to purchase it in its current as-is condition and the price you are hoping to sell it for after your renovations are completed.  These numbers are like the bookends supporting your entire project. The sturdier they are, the less likely the project will collapse. But what’s in between them is also important: your renovation costs. Estimating renovation costs accurately is crucial to achieving your desired return on investment. Unless you have vast construction experience, it’s not easy. However, if you have discipline and attention to detail, you can learn to make pretty good estimates by following the footprint below.

To estimate the cost of renovations, start with the basic property information.

Such information is often supplied as a part of the listing or can be easily obtained via public record. By itself, this information would not tell you much but it will help frame your renovation cost analysis once you are physically on premises. It will also help you address any red flags at the beginning of the process.

Property Size: All other things being equal, a smaller property is cheaper to renovate than a large property. For example, a $60K rehab budget might be enough to thoroughly renovate a 1,000-square-foot property from top to bottom, while it would be barely enough to do cosmetic repairs on a 2,500-square-foot home.

Location: The more affluent the location, the higher-quality renovation it would need. For example, For a rehab in Hagerstown, cosmetic repairs might mean a new coat of paint, new carpets, and builder-grade kitchen cabinets, while “cosmetic” repairs in Washington, DC, might include quartz countertops and smart toilets. The location of the property is a key factor in your renovation cost estimation, as it determines the quality of renovation required.

Year Property Built: Older properties are more likely to have hidden issues such as asbestos, lead paint, mold, termite damage, or outdated wiring. They also may have foundation problems such as cracks, settling, or instability that require extensive repairs. All in all, they often need more thorough inspections to uncover these hidden problems, adding to the overall renovation budget.

Does It Have a Basement? Renovating a property with a basement can be more costly due to several unique factors associated with basements. The good news is that properties with any type of basement typically fetch a higher price. This is especially true for properties with finished basements. As a rule of thumb, having your property on a slab (aka with no basement) will keep your renovation costs low. In contrast, having a basement might require a more generous renovation budget while also offering a higher profit potential. You can read more in our article on finishing basements to increase your rehab value.

Does It Have Public Water and Sewer? For a real estate investor, a preferred answer to this question is always “Yes, it does.” However, it does not mean you should automatically walk away from the properties with their own well and sewer. In fact, many of them might turn out to be excellent investment opportunities – as long as you are aware of what you are dealing with. Replacing a well or a septic system costs MAJOR money. We are talking about tens of thousands of dollars. It also takes time and might require complex permits. You can read more details in our article about septic and well, but if you don’t have time to do it, I want you to remember one thing. The first thing you need to do as a real estate investor interested in purchasing a property that is not on public sewer and water is to order a septic and well inspection and make your contract contingent on the satisfactory report of their condition.

Other Structures: Note if the listing mentions other structures that might be present on the lot. If it does, you might need to increase your renovation budget. If it’s something simple like a shed, it might take only a small amount of money to clean and repair it or even to remove it off the premises altogether. However, it might significantly add to your renovation costs if it’s something as complex as a swimming pool.

Conduct a Visual Inspection of the Property

Once you get excited about an investment opportunity, it’s time to examine it critically. How much risk does this opportunity represent? Can you accurately estimate the renovation budget it needs so you can better understand your potential profits? This is the time to get to the property and physically inspect its nooks and crannies. During this initial inspection you don’t need to have your contractor with you. You can probably assess for yourself whether a property is a complete dump that requires massive rehab or just needs some TLC to let it shine. The visual inspections should consist of exterior and interior inspections.

Exterior Inspection of the Property:

1. Foundation

• Cracks and Shifting: Look for cracks, shifts, or any signs of settling in the foundation, which could indicate structural issues. These structural issues can affect your renovation budget the most.

2. Roof

• Shingles: Inspect for missing, loose, or damaged shingles. Look for signs of aging or wear. For more information on signs of roof deterioration, read our articl on roof replacement for real estate investors.

3. Siding and Exterior Walls

• Material Condition: Assess the condition of the siding material, whether it’s wood, vinyl, brick, or stucco. Look for cracks, rot, mold, or peeling paint.

4. Windows and Doors

• Frames and Seals: Inspect for cracks, gaps, or rot in window and door frames.
• Operation: Open and close windows and doors to ensure they function correctly. It would be great if you can get away with repairing them instead of replacing them.

5. Driveway and Walkways

• Surface Condition: Look for cracks, potholes, or uneven surfaces that could pose a tripping hazard or indicate underlying issues.

6. Decks and Patios

• Structural Stability: Inspect for signs of rot, loose boards, or unstable railings.
• Finish and Stain: Check the condition of the finish or stain to determine if reapplication is needed to protect the material.

7. Garage

• Doors and Openers: Ensure garage doors open and close properly and that openers function correctly.
• Structural Condition: Inspect the garage structure for any signs of damage, leaks, or foundation issues.

8. Landscaping

• Note the current state of landscaping and whether it would require minimal sprucing up or major overhall.

Interior Inspection of the Property

1. Foundation and Structure

• Floors and Walls: Check for cracks, signs of settling, or uneven floors which could indicate foundation problems.
• Ceilings: Look for cracks, stains, or sagging that might suggest structural issues or water damage.

2. Roof and Attic

• Leaks and Insulation: Inspect the attic for signs of leaks, proper ventilation, and adequate insulation.
• Pest Infestation: Check for signs of pests such as droppings or nests.

3. Plumbing System

• Water Pressure: Test faucets, showers, and toilets for adequate water pressure and proper drainage.
• Leaks and Corrosion: Look for leaks under sinks, around toilets, and at the base of water heaters. Check pipes for corrosion.
• Water Heater: Look for signs of rust or leaks.

4. Windows and Doors

• Operation and Seals: Open and close all windows and doors to ensure they function properly. Check for gaps or broken seals that could affect energy efficiency.
• Condition: Look for signs of rot, warping, or condensation between double-pane windows.

5. Kitchen

• Cabinets and Countertops: Check for structural integrity, signs of wear, and proper alignment. In some cases, these cabinets can be refurnished saving you time and money. Many kitchens can be well-mainted but hopelessly outdated when it comes to style. Look at other renovated kitchens in the area when deciding on how to proceed.

6. Bathrooms

• Water Damage: Look for signs of water damage around tubs, showers, and sinks.
• Appliances and Vanities: Note if any appliances or vanities are worth salvaging to control your renovation costs.

7. Floors and Walls

• Condition: Even the minimum renovation budget will include a coat or two of paint, so don’t sweat looking for peeling paint. However, uneven and warped walls might be indicative of more serious problems. Also, buyers love wooded floors, and so if the property has wooded floors that can be salvaged, make a note of them.

8. Basement and Crawl Spaces

• Dampness and Mold: Look for signs of moisture, mold, or water damage.

9. Pest Control

• Signs of Infestation: Look for signs of pests such as droppings, nests, or damaged wood.

Experts to Help Estimate Your Renovation Costs

Once you’ve inspected the property yourself, you should have a decent idea of whether it requires a major overhaul or whether cosmetic repairs would suffice. At this point, you can decide either to walk away from it or pursue this investment opportunity further by consulting experts who can help you accurately estimate your renovation costs.

Here are the key experts who can help:

General Contractors

A general contractor is your main guy. He will oversee all aspects of the renovation, from initial planning to completion. If your general contractor is skilled and diversified enough – and if your renovation is limited in scope – you can get away with working and contracting with him only. He is also the main person to help you estimate your renovation costs accurately. In fact, his skill and reliability depends on how closely he can stick to the initial scope of work without bombarding you with change orders.

However, you might also need to bring additional experts to help answer your questions and, hopefully, keep your renovation costs in check. They are:

• Roofing Company
• HVAC specialist
• Electrician
• Plumber

Conclusion

Evaluating a property’s condition before purchasing it as a real estate investor is essential to making informed decisions, managing risks, and maximizing returns. It helps in financial planning, risk mitigation, value assessment, negotiation, and ensuring compliance and safety. Thorough property evaluation ultimately leads to more successful and profitable real estate investments.