One of the biggest issues we see when working with an investor on their property rehab is that they haven’t fully considered what it will cost to remedy some of the major issues of the project – what we call “The Big Five.” Although the property may look like a fantastic deal it is extremely important to understand the full scope of the rehab costs involved up front. Underestimating rehab costs will eat your ROI for lunch. Time for a reality check.
Many investors focus on remodeling vs. rehabbing. Remodeling should be viewed as the icing on the cake. You may want to create an open floorplan or upgrade to the latest kitchen and bath styles to competitively market the property. That’s all fine, until a prospective buyer’s inspector comes through and tells you the roof is bad, the electrical wiring isn’t to code, and by the way, there’s some water leaking into your crawlspace.
If you underestimate the cost of essential repairs, you risk losing serious cash.
While you should always have a contingency fund for unexpected change orders during a full rehab project, the goal here is to avoid enormous cost overruns and to avoid as many surprises as possible. SGF recommends that investors have inspections performed by qualified contractors or a licensed home inspector on “The Big Five” items, at a minimum. A few hundred dollars spent up front on inspections allows for informed buying decisions and a reduced probability of uncovering a major unbudgeted expense during rehab.
Let’s take a look at “The Big Five”:
How old is it, what is the remaining life expectancy, are there multiple layers, loose shingles or visible leaks, including the vents, chimney and gutter system. Roof replacement can range from $5,000 – $10,000 or more, not including other related repairs to chimneys, gutters, soffits, decking and more.
Air conditioning, heating, ductwork/venting. A full inspection by a licensed HVAC company can inform you about the age and functionality of all related systems and components. Proper cleaning and component replacement by a technician can often extend the life of the system. Installing a new HVAC system and/or furnace can hit your budget another $6,000 – $15,000 or more, especially if both are needed.
A plumbing inspection will identify the type and age of the piping, current leaks, the shut off valve location, and the drain system. Inspection of the water heater will determine condition, age and remaining life. An inspector will alert you to impending failures and potentially costly repairs, which could include replumbing the entire house.
An inspection of the electrical system will identify Amperage, service cable, panel, circuits, wiring, fixtures, and existing or potential hazards.Some older homes have “knob and tube” wiring that dates back to 1920s or 30s which cannot be grounded and is a common cause of shorting and fires. Many insurance companies will not issue coverage if knob and tube is part of the electrical distribution system, potentially requiring a complete re-wire of the property.
A qualified inspector will identify any signs of movement or cracks in the foundation, sloping floors, water penetration into basement/crawlspace/attic, any issues with beams/joists/posts.
Be aware that once a contractor pulls a permit and starts making repairs, inspectors will visit the property to ensure all work has been performed to current code requirements. Often, if they see anything else that is out of code, they won’t close the permit until additional repairs are made. Inspections by qualified contractors and inspectors will identify issues up-front to minimize surprises during rehab. No one, not even the contractor, wants that!
Issues with any one of the “Big Five” can run into thousands in repair costs that, if identified early, can be either be built into the budget and resulting ROI projections or lead to a decision to invest in a different property. The more informed you are as an investor, the more likely you are to meet or exceed your ROI objective for each property you decide to purchase and re-hab.