One of the most critical factors for profitability on a rehab project is planning for a sufficient budget at the beginning, before you purchase the property.   This impacts the amount of capital you need to complete the project and the profits that should be making it a worthwhile venture for you. A few factors play into getting the rehab budget right.

First, as the person in charge of the project, it is your responsibility to know costs.  Having a basic idea of non-retail replacement costs will serve you well.  If you’re just getting started, ask other investors what they’re spending on things like roofs, windows, HVACs, etc.  Get very familiar with the inside of your neighborhood Lowe’s or Home Depot.  Knowing the price of interior and exterior doors, plumbing and lighting fixtures, replacement windows, and basic tile will help build the foundation for your material budgeting.

The next step is to get quotes from multiple contractors, based on a standard scope of work, and quoted back to you in line item detail.  For some of the bigger ticket items, you may want further clarification on the labor and material breakouts.  Don’t be afraid to ask contractors for more details on the quote.  You need to know if they’re giving you a fair price, underestimating (which will cost you down the road), or padding their price (time to negotiate). If you haven’t closed on the property yet, even having some rough estimates from contractors during the inspection period will either confirm you’re buying it at the right price or indicate you need to reconsider.

Once you pick the contractor and have a written, fixed price agreement with them, it would be nice to think that everything will go as planned and there wouldn’t be any surprises.  However, in renovations, there are always unknowns and they usually cost more money, not less.  Putting a number in the project budget for an “Oops” factor is the best way to keep this from derailing your profits.  If you make this number 200% what you think it could possibly be, that’s a decent start.  Worst case, you exceed even that number so you’ve minimized your exposure.  Best case, you don’t use any of it and you’ll see profits beyond what you anticipated.

Taking into account your contractor estimates and the “Oops” factor, is the project still worth doing?  If not, can you renegotiate price?  If you’ve already closed, where will the additional capital for repairs come from or is there a better exit strategy?

The more familiar you are with project costs, the better you get at negotiating with contractors for fair prices, and the more you plan for an “Oops” factor, the more smoothly your project should progress.  Every project is a learning opportunity.  For more secrets of successful rehabbing, get the book here.