What does rehab mean?
In the real estate lingo, to "rehab" means to rehabilitate or renovate a house. Fix and flip and rental property investors commonly purchase properties that require anywhere from minor to major rehab work in order to cost effectively build equity value in a property.
What is an example of a rehab project?
Let's say you buy a home for $100,000 that, based on comps, will be worth $300,000 if you invest in repairs and cosmetic improvements. The question now is how much will it cost to rehab this property? See the sections below to learn how to estimate your rehab budget.
If your rehab budget is $100,000, then your total investment (not including financing and closing costs) is $200,000. If your goal is to BRRR the property (buy, rehab, rent, refinance), then you are looking at pulling out $225,000 if you refinance at 75% LTV.
In this example you will end up with 25% equity in a cash flowing rental property and as much as $25,000 more than you started with to use on your next deal. This is why many rental property investors focus on cash on cash return as their primary deal evaluation metric.
How to estimate rehab budgets?
To accurately estimate a rehab budget, you must carefully assess all of the work required to bring a property to its target after repair value (ARV).
How to keep your rehab budget low?
To keep your rehab budget low, you want to eliminate unnecessary costs. For example, if you have enough time to manage the project yourself, then you do not need a general contractor. General contractors typically take 10 - 15% of the total project value. So if you are quoted at $100,000 for a rehab project, you can assume your general contractor is making $10,000 - $15,000.
Another way to drive down your rehab costs is to make your suppliers (sub contractors, materials) submit competitive bids. This will keep them honest and bring out the best value they are willing to offer. We recommend asking for bids to show, line item by line item, exactly how the component costs add up to the total quote. For a kitchen rehab, this means you will want to know exactly how much the contractor or supplier is budgeting for counter tops material (price per square foot) and labor (installation).
A final way to keep your rehab budget under control is to understand the cost basis for the work you are sub contracting. If you understand material costs and cost of labor for each component of your project, then you will know what to budget for each component and you will know when a contractor might be overcharging or taking advantage of you. There is often an "investor" price and a "retail" price, and the difference can be considerable.