How To Calculate Your Repair Estimates For Rehab Properties Without Being An Expert

BusinessHome Business

  • Author Mike Warren
  • Published September 22, 2010
  • Word count 1,097

Many of the cash investors out there are buying up these properties like hotcakes! Prior to the real estate crash deals were a lot more difficult to come by. Even properties that needed a lot of work were going for close to market value because of the way property values were going up.

Now that property prices are coming back down to realistic levels, there are plenty of good deals that can be had. Case in point, one wholesale investor I know just recently made $20,000 plus agent commission (she is also a real estate agent) flipping a short sale to an all cash investor. She does real estate part time and this one deal equals more than a third of her salary from her full time job.

However, the big money was made not by her, but by the investor that she flipped the property to. He purchased a property that is worth $350,000 fixed up for only $170,000. He’s actually going to make even more when he sells it because he is going to convert the property from a one family to a two family.

So let’s say as a two family the property is worth at least $400,000 and the total conversion and holding costs come out to $100,000. He buys the property for $170,000 cash, plus $100,000 in conversion costs. He sells the property on the market for $400,000. His total profit is $130,000 with a $270,000 investment. That is an over 48% return on investment, assuming it took 12 months to complete. Keep in mind, it could take less time than 12 months and the holding and repair costs could be even lower.

So how do you position yourself to make that type of money? You do that by understanding how to calculate the total repair costs required to do a deal. While you may not have $270,000 cash to do a deal like this, you could certainly do a deal like this if you had $90,000 cash. A lot of people have way more than $90,000 cash just in their 401Ks and we know they aren’t getting a 48% return on investment from that.

So before we begin with how to calculate repair costs, let’s see how you can do a similar deal with $90,000 cash from your 401K plan and actually generate an even greater return on investment than the investor who is investing all cash in the deal.

Let’s say you withdraw $90,000 cash from your 401K plan. Assuming you get taxed at a rate of 25% and you get hit with a 10% early withdrawal penalty you would be left with $58,500 remaining to invest. Keep in mind your tax rate could be lower depending on what your income is. Also keep in mind that if you are changing jobs you could get all $90,000 tax free by opening up a self directed IRA, transferring the money from your 401K plan to your self directed IRA and investing in the IRA.

So now with $58,500 cash, you take out a mortgage for $170,000 to purchase the short sale property. With a 20% down payment, you put down $30,000 and get an interest rate of 6% Let’s say your total holding cost for the year came out to $15,000. That means you have $45,000 invested into the property.

Next you hire the contractors to do the work and take out an $85,000 loan which is financed at 100% by the contractors. Most contractors would have no problem with giving you 100% financing. That works out to about $9,000 in monthly payments for a full year. You would still have $6,000 cash remaining out of the $58,500 you used from your 401K plan.

Now you fix the property up and sell it on the market and after 12 months, the property is fully sold for $400,000. Assuming $10,000 for closing costs (which is pretty high); let’s say you have $390,000 remaining. You pay off the $170,000 mortgage and the $85,000 contractor loan (most of your monthly payments would go to interest in that 12 month period). Your remaining profit is $135,000.

So with a $90,000 investment from your 401K plan, even with taxes and early withdrawal penalties, you would have grown your investment by $45,000, which is a 50% return on investment. If you used the self directed IRA approach with no taxes and penalties, you would have grown your investment by $76,500, which is an over 130% return on investment.

As you can see there is a lot of money available in the rehab property game, even if you aren’t sitting on hundreds of thousands of dollars in cash available as an investment. So now the question is, how do you estimate repair costs even if you don’t know a whole lot about what it takes to fix up a property?

There are two strategies that you can use to help you to get a great gauge on how much it is going to cost to fix up the property. The first strategy is to take home improvement classes. Many home improvement stores such as Home Depot and Lowes offer these classes for free. Also, many cities have a housing development corporation that also offers these classes for free. Taking these classes, even if you have no intention on ever doing the work yourself allows you to have a better understanding as to what is involved in the repair process. This way, you will know whether you are getting a good deal or not from contractors.

In sales, there is a saying that you make up in numbers what you lack in skills. This brings us to the second strategy that you can use to estimate repairs. You make up in contracting estimates what you lack in skills. Unless you have a contractor you trust completely, or a partner that will be handling the repairs aspect for you, get bids from at least three separate contractors. With three separate bids, you are often going to catch whether a contractor is ripping you off because you will see a big variance in the bid prices. If you want to be even more certain, feel free to get bids from four, five or even six different contractors. It costs nothing for you to get estimates so it’s better off to overkill in estimates than to not get enough if this is not a strong area for you.

By combining personal research by taking classes with the expertise of entertaining bids from several different contractors, you will be able to more accurately estimate repair costs. Of course, if this is your first time, you would be better off doing a simpler job for less profit and working your way up to the more complicated jobs so that you can get experience.

Mike Warren is a real estate expert and trainer.real estate expert To get some of Mike’s Free CD’s, reports,videos, courses and more please visit our website at http://misuniversity.com/blog

Article source: https://articlebiz.com
This article has been viewed 6,474 times.

Rate article

Article comments

There are no posted comments.

Related articles