One of the hardest parts of buying a new property is how to estimate rehab costs for it. Remodeling costs are probably the largest line item on your expense sheet and it’s very important to estimate them accurately.
The worst part about it – it’s impossible to have a contractor attached to your hip.
You might have to make 10 or 20 offers on different properties before one is accepted. No contractor will give you 10-20 estimates for rehab projects just so you can make your offers. Many won’t give an estimate until the property is under contract.
This makes us stuck in a catch-22. You need estimates in order to make offers but can’t make offers without estimates.
So, you need to learn how to estimate the rough costs on your own so you can make as many offers as you need. But, this is very challenging because every market is different and there are also several different ways to estimate your rehab budget.
3 Methods to Estimate Rehab Costs for Rental Property
There are a lot of ways to estimate a project cost, especially for multi-million dollar projects. Since we are focused on normal-sized rental properties, we’re going to focus on projects that the average contractor does.
All projects have 3 costs – labor, materials, overhead, and profit added on top. The expenses can fit into one of 3 categories with profit being added on top. All a contractor is trying their best to estimate the costs in each category then add a profit margin on top.
Each of the next 4 methods is a various way to estimate those costs and the kind of project will dictate which method is best for you.
Estimate Rehab Costs With the Stick Method
This is the hardest and slowest method. If you are very experienced in the field, then this will give you the most accurate results. If you are not, then you are still very likely to miss a lot of things.
This method has you adding up every nail and 2×4 you’ll be using, then estimating the cost to install each item. That’s where it gets the name from – because you’re looking at every stick.
Many contractors use some variation of this method to estimate a project. But, we are not going to. We’re talking about it so you are aware of what it is and that you don’t want to be using it.
Labor Hours Method
This method is very easy and commonly used for basic labor or for complex projects where the materials are very cheap.
On the low end of the spectrum, you’d use this if you were hiring a crew to dig holes, cut things down, empty debris. Alternatively, a complex project with cheap materials could use this method as well. Artistic patterns for plaster or fireplace mantels could potentially be estimated with this method.
To estimate this you need to have an idea of how many people will be working and how long it will take them to complete. For example – 5 days for 3 people.
Then you just need the labor cost you’re being charged for that crew, and the rest is simple.
Imagine you need to hire a skilled contractor and 2 laborers for a remodeling project that will take 5 days to complete. They quote you a rate of $960 per day for the crew. It’s easy enough to calculate the approximate cost is going to be $4,800 + materials.
Now you just add a cushion to the budget and you’re good to go.
Square Foot Method Remodeling Costs
For very large and complex projects, you may want to estimate with the square foot method.
This is a very approximate method and shouldn’t generally be used to quote projects, unless it’s some sort of uniform product that doesn’t change much from house to house, such as building a deck. A deck can easily be quoted on a square foot basis because there is very little variation so the margin of error will be small.
Even though it’s very inaccurate, many investors will estimate the cost of a large project using this method. They do this because it’s fast and easy even if the margin of error is very high.
This is useful if you are making a lot of offers but it can also cause you to lose a lot of bids because you will most likely be over-estimating the cost of the rehab projects.
In general, investors will estimate rehab costs as being somewhere from $10 to $25 per square foot. A 1200 sf single-family would range from about $12,000 to $30,000 under this method. If you need major items replaced you may need to estimate them separately.
You’ll look around a property, get an idea of how extensive the project is, then pick a price per foot based on that. As you can see, this is very unlikely to be accurate.
Unit Pricing Method
The unit pricing method is where you take a larger project based on your due diligence inspections and “chunk” it into smaller pieces. Then, you’ll make estimates for those project “chunks” and add them together to get a project cost.
So, if you are remodeling a 3-family rental property you might break it down into 4 or 5 chunks as such:
- First-floor interior: $7,000
- Second-floor interior: $3,500
- Third-floor interior: $5,000
- Exterior: $15,000
- Basement: $5,000
- Total Cost: $35,500
With the chunking method, you have found a great middle-ground for speed and accuracy and this is the method we recommend most.
It’s slower than the square foot method but more accurate. It’s much faster than the stick method but only slightly less accurate.
Unit Pricing – Interior Remodeling Upgrades
I’m going to give you some basic rules of thumb that I’ve found to be useful in various cities around the US to estimate rehab costs. I do want to highlight that these are rough approximations and you shouldn’t use them until you verify it with local contractors.
Prices vary a lot over time and between markets. So, there is no one-size-fits-all answer. The method works but the actual dollar values will need to be adjusted.
Here is a table where I break down interior rehab projects based on light, medium, and heavy scope of work. Furthermore, I scale the cost up based on the quality of the finishes.
|Nice Quality (15%)||$4,025||$5,750||$8,050|
|High End (30%)||$4,550||$6,500||$9,100|
A light rehab project might just be floors, paint, and some fixtures for an average 650-750 sf apartment.
A medium rehab project will include an appliance or two, replacing countertops, or cabinet refinishing.
A heavy rehab project would be all of the above.
As mentioned before, you will need to estimate other items separately because I’ve “chunked” the interior upgrades into their own category.
Big Ticket Item List
Now you need to make a list of all the major items that need to be replaced. Also, if you need a full gut and refinish in one room that should be estimated separately. here are some rough ideas.
- Roof $5,000 +
- HVAC $3,500 – $5,000
- Heating System Replace (unit itself) $3,500 (Base) – $10,000 (High Efficiency)
- Vinyl Siding $7,000 – $15,000
- Vinyl/Laminate install $1.5-$3/ft
- Entire Kitchen – $10,000 – $12,000 (Average floor, cabinets, counters, fixtures, paint, etc. materials incl.)
- Entire Bathroom (average) – $3,000 – $4,000 (all inclusive)
If you had a 2-family property that needed one light and one medium upgrade (base level) along with a new roof and one new HVAC I’d estimate:
- Unit 1: $3,500
- Unit 2: $5,000
- HVAC: $4,000
- Roof: $5,000
- Misc: $1,000
- Total: $17,500
Conclusion – Estimating Remodeling Costs for Your Rental property