How to Estimate Rehab Costs from Scratch (Materials & Labor) (Rookie Reply)

Ashley:
What if the deal you already closed on is the one that’s quietly draining your bank account every single month? And you have no idea whether to hold onto it or you should just cut your losses.

Tony:
Today we’re answering three real questions from the BiggerPockets forums that hit exactly where rookies feel the most pressure. What to do when your first rental is losing money from day one, how to estimate rehab costs without blowing your budget or over improving for the neighborhood, and how aggressive you can actually get on offers without burning every bridge.

Ashley:
This is The Real Estate Rookie Podcast. I’m Ashley Kehr.

Tony:
And I am at Tony J. Robinson. And with that, let’s get into today’s first question. So the question says, “I recently used a VA loan to buy a condo two years ago for $440,000 at a 6.25% interest rate. Seeing rates fluctuate, I’ve refinanced to 5% and brought my monthly payment down to 2955 plus 350 for my HOA, totaling 3,350. Now, I have to relocate for work and I contact a couple of property managers who estimated I could rent it out for around 2,900 bucks per month. That’s negative cash flow every single month. It’s in a really nice neighborhood, gated, great communities, everything. I’m wondering if anyone has been in a similar situation. Should I hold on and eat the laws or sell and redeploy the capital? What would you do? Oh, this is a great question. I think there are a few things to consider here.
So this is one of the questions that I always ask is like, “Hey, what are your goals when it comes to your real estate investing?” And obviously a negative cash flowing deal is not anything that anyone wants, but what if this is in a neighborhood where appreciation is going to rapidly outpace the rest of the country? And even though you’re putting in a couple hundred bucks for maybe the first several years, and five years from now or seven years from now, maybe rents have gone up exponentially and now you’re making money every month, but you’ve also got that added benefit of the loan pay down and the appreciation over that time as well. And maybe the couple hundred bucks you’re putting in to cover that shortfall is well worth it over the next five years when you tack on appreciation and the increased rent growth.
So I think just looking at it, not just from like, “Hey, what does it look like today, but how does this look long-term? And what are my goals with this property and what are my goals with real estate investing?” Might give you a slightly different perspective. And then I think the other thing I’d focus on too is you just looked at one strategy. What if you maybe look at some of the other strategies that exist to maybe supercharge some of the cash flow that’s happening here? What if instead of renting it to a traditional long-term rental tenant, what if you did something like rent by the room, where you’re renting out to individual people and every single one of those rooms is producing cashflow? Can you make more revenue that way? If you turn it into a short-term rental, if you turn it into a mid-term rental, we just had Noble Crawford on a podcast talked all about government contracts.
What if you did a government contract on that house and did something in that way? So I think there are more opportunities in front of you than just what you’ve seen from the traditional long-term rental component as well.

Ashley:
Yeah. I think the first thing to really look at is the deal analysis. So what does that negative cash flow number actually include? So is that even including the property management fee? So you had given us your total monthly cost is 3,350. So what does that cost include? Is that your mortgage payment? Is that your insurance? And then plus another 350 for the HOA. But what about a leasing fee, the percentage to the property manager? In some places, you have to keep the water in your name so you’d have to bill them back for the water and things like that. But look at that realistically, but I also don’t want you to look at it as a loss. Like Tony said, in the future, can this property appreciate? Can rents increase in this area? Is there opportunity for appreciation? Think about somebody that invests in the stock market.
They’re taking money every month and they’re putting it into, maybe it’s their retirement account, maybe it’s a brokerage account, whatever it is, they’re putting money into it. So they’re taking money from their W2, from their income source, and they’re putting it into something. So you could look at this as I am putting $450 every month into my property and I am investing in it because in five years, I think this property is going to double in value and I will make back way more than I actually put into this property. Okay? But that’s guessing.That’s an estimate and that’s what can come with real estate when you bank upon appreciation, it’s not guaranteed. So the second thing is how detrimental would this additional payment be for you each month? If you want to go after the appreciation, but you’re really going to have to struggle financially to make sure you make that payment, what happens if the tenant moves out and now you have to pay the full payment for a month for two months until the property management company gets it rented out?
Can you afford to do that too? So when you have a cash flowing property, there’s more wiggle room because you’re making income, you can save that money for those actual vacancies or big expenses. So it doesn’t seem as such a burden when you have to make the payment because you’re not making any cash flow or whatever to save to cover that. So I think really look at those two things. What do you want out of this property? And then also, can you financially support this property as an investment? And do you think that in the future it will go ahead and be a good play for you financially?

Tony:
Ash, last thing, he also bought this using a VA loan, which means more likely than not, he put 0% down. So I also think the bigger question is, have you even seen enough appreciation over these last two years that you’ve owned this property to offset whatever costs are associated with selling the property? Because unless you’re an agent and you’re selling this yourself, there’s going to be buyer’s agents, your own agent, there are other closing costs associated, six to 8% of your sale price might just be gone immediately from just the transaction itself. So I wonder if you’ve actually even built up enough equity in this deal so that you’re not writing a big check at closing anyway. So just one more thing to calculate as you walk through that decision.

Ashley:
Yeah, that is a great point because it doesn’t say what the property is valued at right now. He does say that two years ago he bought it for 440,000, but then he does say, should he redeploy the capital, seeming that he is expecting to get some money back and it’s not just paying off the loan that he has on the property. Okay. Coming up, your rehab budget can make or break your deal, but most rookies have really no idea how to build one. We’ll show you exactly how to estimate renovation costs without over improving for the neighborhood right after this. Okay, welcome back. So we just talked about what happens when the numbers don’t work after closing, but what if you could prevent that problem entirely by getting your renovation budget right before you buy? So our second question today is, I’m in the process of getting my first investment property, a duplex, and I have a few questions about this Burr project.
The main one is, how do you actually estimate rehab costs? I know I need itemized bids, but I want to understand typical costs for things like flooring, paint, bathroom remodels, kitchen remodels. How have you navigated this? I also know you don’t want to overly renovate for the area, but how do you know when enough is enough? I’ve been looking at pictures of sold homes and rented properties in the area. Is that a good strategy? So right off the bat, if you are a BiggerPockets Pro member, I highly recommend you take advantage of this, but you can get Home Depot Pro pricing as it’s on the Pro Perks page, but when you log in and you sign up for that Pro account with Home Depot, they actually have a rehab estimator tool. So basically you go in and you tell them, I’m going to be remodeling a bathroom, a kitchen, a bedroom, whatever it is, and they will literally give you a list of every material they think that you would need for that room to be able to do a full remodel on it.
And then you can kind of go through and look and be like, okay, well, it’s a single vanity half bath, so I just need the single vanity. And you can kind of go through and see, maybe you already know there’s items you wouldn’t need or you would need and you can add those in. So I think that’s like a great starting point. Long time ago, I used to actually go on to Home Depot or Lowe’s and I would YouTube videos on what I needed, for example, how to change out a toilet and I would be like, okay, I need this, this and this. And I’d go and I’d fill it into my shopping cart at Lowe’s and that’s how I’d estimate at least what my materials are. But Home Depot, it just gives it to you if you sign up for one of their pro accounts and you can just go through and they’ll tell you what you would actually need for remodel.
So you can at least build out your material pricing based off of that. As far as the labor, you have to call around and get quotes. You can go into your home improvement store and they will have signs. There are some trades that are easier to estimate than others. For example, flooring, like okay, you could see a sign that Lowe’s says that they’re going to lay down, they’ll install your flooring for $3 per square foot. So you have a rough idea. You could get it more expensive, you could get it cheaper, but at least you know you have an average amount that worst case scenario, you can go to Lowe’s and get that done because you estimated for it. And then there’s other things that are harder. Electrical I think is harder to estimate plumbing. Even I just got a estimate for an HVAC system and a property and I asked three contractors.
One came back within two days and said $40,000 to have all this done. The second one, I went to the property a week later I followed up, said, “I’ll have it to you in a couple days.” Never got the estimate. The third one, $25,000. So big difference, 40,000 to 25,000 for material and labors on it. So it is much harder. When you’re looking at pictures of renovated homes, this will really help you for your comparables as to how high end you should actually go and what finishes you can use. And that would be better to do before you actually start itemizing and breaking down the materials that you need to buy. So for example, in one of my rental properties in one of the small towns I invest in, I’m not putting in granite countertops, I’m not putting in full tile bathrooms because no matter what, nobody’s going to pay me more than what the ceiling market rent is in that area.
Even if it is luxury and more extravagant, that renters just don’t pay that premium in those areas or it’s going to significantly reduce my buyer pool too.

Tony:
Yeah, Ash, incredible breakdown. And I think the only thing I’d add to that is, I’ve done this a few times now, but I’ve talked in the podcast a few times about me going to Oklahoma City last summer. New market didn’t have any connections and know anything really about the market. Spent a few days there talking with agents and contractors and I just walked a few properties with a contractor and showed him, “Hey, here are some of the comps that I’m looking at for this specific property. What do you think it’ll take to get this one from where it’s at currently to where this potential comp is? ” And over the course of that conversation, walking a few properties, I was able to get a rough price per square foot on a rehab if it was a super maybe light cosmetic rehab, if it was a full gut tear down rehab.
And I was unable to use those numbers to help me then underwrite deals even when I wasn’t with that contractor. So it became super beneficial just to get a rough kind of ballpark number to use. And then once you actually find a deal and you’re getting to the point where it’s like, okay, I’ve used this ballpark number to get my initial thoughts, if you’re under contract on something, that’s when you actually get contractors into the property. And the more you can get the better, right? Three I feel like is the magic number because usually one of them is going to be a big outlier, either super expensive or incredibly inexpensive and you’ll get two that are closer to each other. But with that, you’ll get a better sense of like, okay, what does it actually cost to take this property from where it’s at to the condition that I want it to be?
So those are the approaches I’ve taken to help me wrap my head around rehabbing estimate or estimating rehab costs without being a contractor myself.

Ashley:
And I think one more thing to point out too, like when you are getting estimates, like for my HVAC example, I’m taking the lowest bid and it seems really low compared to what the highest one was. And I should state that with a red flag and a caution sign as to like, it’s not always in your best case scenario to take the lower bid. The reason we’re taking it is because all three contractors that we got quotes from, we worked with all of them, done projects with them all before and they all were amazing and all work great and we continued to do stuff with them. So sometimes the labor is more costly on the other ones. The other ones are more companies where the person we went with is just an individual that does it and they tend to not have as much overhead as somebody that has a company.
So sometimes we can really save on the labor side of things. All

Tony:
Right guys, we’re going to take one last break before our next question, but while we’re going, if you haven’t yet subscribed to the Real Estate Rickie YouTube channel, you can find us at Real EstateRicky and you can hang out with us there as well. We’ll see you right after this last break. All right guys, we’re jumping back in. And before we get to the last question, if you’re listening to this and you enjoy the Real Estate Rookie podcast and you want to be a guest, we’d love to hear your story. Even if you’ve only done one deal, your story can still inspire the next generation of real estate rookie. So head over to biggerpockets.com/guest, fill out that application and who knows, you might be the next story that we share. But jumping into our last question here, knowing what a property is worth and knowing how to renovate it or really only half the battle, you still have to get the seller to say yes at a price that actually works for you.
And that’s what this next question is about. All right. So this next question says, I have two clients who are business partners interested in making aggressive offers on various listings. Their approach resembles the BER method. For example, we have a three bedroom, two bathroom home and fair condition requiring less than 20K in cosmetic repairs that has been on the market for quite some time. The price reductions have been minimal and the current listing price is 300K. My clients want to submit an offer at 230K. As a buyer’s or seller’s agent, how would you respond to this? What are the implications and is there a smarter way to structure aggressive offers? So this question actually looks like it’s coming from an agent because they’re referring to their clients, not necessarily investor, but I think the premise of this question is, how do I submit an offer that’s below asking without pissing people off?That’s kind of how I’m reading it.
I think first, before we can even get into the tactical pieces of the offer itself, just from like a mindset perspective, I think a lot of Rickies get too caught up in the idea of offending the seller or even like offending their agent and making their agent do all this work. And I’ll talk about both of those. On the agent side, that’s why it’s so important guys that we say you need to work with an investor-friendly agent. It’s not just like lip service that we talk about, it’s something that’s important because agents who work with people buying their primary residents have a very different mindset than someone who’s working with an investor. They understand that investors are looking for deals. They understand that the majority of the offers that investors put out are probably going to be denied, and yet they’re willing to do that because we are volume clients for them.
If I’m buying my primary residence, I mean, what? That’s maybe a couple times in my life that people might actually move and buy a new home. Whereas an investor, it could be a couple times a year or maybe even more if you’re really scaling. So using something like the BiggerPockets Agent Finder tool and finding agents who actually understand what it means to be an investor is a first piece because they’re going to help you navigate that for their specific market. And then on the owner side, I always give this example. Ash and I, we both had properties that were sitting on the market for quite some time. And like Ash, if someone came to you and they’re like, “Ashley, I’m going to give you 25% of your list price.” What would you have said to that person?

Ashley:
That’s basically what I ended up taking. No, not that bad, but yeah, I was so motivated. I think right away I had a lower offer that I said no to just because it had been listed right away, but eventually it got to the point where we literally had no showings for probably like three or four months. And at that point I got really desperate as to like, “I’ll take anything.” And then it started to pick up a little bit again. We started to get showings and then I had two offers to actually choose from. But I mean, we listed at 129 and I ended up selling it for 95,000. So I was like motivated to get rid of it.

Tony:
And that’s my point, like two things, right? Number one, even if you give someone an incredibly low offer to begin with, it’s not often that that person’s going to say, “Your offer is so low that I don’t ever want to hear another offer from you again.” Because if you submitted a super low offer at 1:00 PM, they didn’t even reply and you submitted an above list price offer at 20 PM, they’re probably going to take your second offer. I don’t think there’s anyone that I’ve seen so far that is so offended by a first offer that they won’t even entertain a second offer from you. So just like get that out of your head. And then the second piece is that, to Ashley’s point, we don’t know the mental state of that seller. We don’t yet know what their motivations are. We don’t know what their life circumstances are.
We don’t know why they’re selling that property. And until we put an offer in front of them to gauge their level of interest in actually having a dialogue about price, then we’re just making assumptions. So for me, it’s always, let’s put the ball in the seller’s court and give them the opportunity to at least respond or at least say, “Hey, I’m not interested in that. ” So then we know where to go from there. So I think a lot of this is just built out of fear of people freaking out on the other end, but we’ve got to realize this is a transaction for them all the same and they just want a number that’s fair and we’ve got to start somewhere.

Ashley:
One thing that my agent always does is she always does a verbal offer for me, as in let me have a conversation with the agent and see if they’re even in a ballpark before we go ahead and write something formal up. And I think that just gives us so much more insight as to, okay, they’re talking, they’re having conversation where maybe the seller’s agent gives some information as to like, no, they have a mortgage on it, the property for more than that. They can’t take less than whatever, something. So I think having that conversation instead of just submitting a formal contract and saying, “No, they don’t accept.” It is a huge benefit and it doesn’t waste the agent’s time filling out all of that paperwork because that’s literally why I don’t want to be an agent because I don’t want to fill out all of that paperwork.
But I think that’s a huge thing that you can do. But also I did take a low offer on a property that I just sold. I had it listed for I think 109 and I ended up taking an offer for 90,000 and I took it within the first week. I had, I think, five showings and I had one offer at the 90,000. That was my first offer and we got a couple more showings. So we held off on accepting it and then we had somebody else offer us like 75,000. So I was like, “I’m just taking the 90,000.” I bought this house for $50,000 in 2018, so I’m almost doubling what I bought it for and it’s been a cash flowing rental property for that long. I did one remodel on it, but it was only like a couple thousand dollars I put into it.
And so I’m very happy with at least making money on this property that yes, I wasn’t going to be greedy and I took a lower offer than what it was listed. So that’s always something else to remember is that just because that’s what the listing price is, that doesn’t mean that’s actually the number that somebody would take. It could be that the agent is saying like, “You can actually get more for this or whatever and hyping them up.” Or it could just be you want to see what you can get. But yeah, I wouldn’t be afraid of making low ball offers or getting embarrassed. And I think yes, there are going to be other agents and sellers who are offended. I’ve offered on properties where people were offended and told me no, but then a couple months down the road, they actually end up selling the property for less than what I offered and it makes me so mad.
But now I’ve learned to continuously follow up, have your agent follow up a couple weeks later, a couple more weeks later, have them keep following up to let them know that you are still interested and that offer is still out there. Well, thank you guys so much for joining us today for this episode of Real Estate Ricky. I’m Ashley. He’s Tony, and we’ll see you guys on the next episode.