Real Estate Investors Terminology. This Week We Look At Repair Cost And How To Determine This Value.
A successful in Real Estate Investor has a good understanding of the key terms that Real Estate Investors use, what they mean, and how the values for the terms are determined. Once these keys terms are understood, then the Real Estate Investor can begin to understand and be successful in the Real Estate Investing business.
As a reminder, over the next several blog posts I will be digging deeper into the key terminology, explaining the meaning of them, and how they are determined. The last post in this series will bring it altogether to look at the potential profit or loss of a Real Estate Investment.
The terms we will be discussing are After Repair Value (ARV), Initial Purchase Cost, Repair Costs, Financing costs, Transaction costs, Buying & Selling costs, Holding cost, and Profit/Loss. Each of these terms is important and can have a big impact on the ability of and Real Estate Investor to make a profit. The potential profit or loss in a Real Estate Investment can be calculated by this formula:
After Repair Value – repair cost – financing cost – transaction cost – buying and selling costs – holding cost – initial purchase price = potential profit/loss
Repair Costs
This week we are reviewing Repair Cost and how to determine the value. Repair Cost is defined as the cost to renovate a property to a condition that it can be sold successfully to a retail buyer. The cost would include material and labor that are used for the renovation of the property.
Repair Cost is easy to define but difficult to determine. However, utilizing a systematic approach to evaluating a property for the repairs needed greatly simplifies the process of determining the repair cost. I have taken the time to study this process and to work with other more experienced investors to develop a spreadsheet to help calculate the cost of repairs.
As an example, a typical property may need to have a Kitchen updated. This normally means replacing cabinets, countertops, flooring, plumbing, appliances, fixtures etc. Depending on the neighborhood the property is located in, you may need a “High End”, “Mid-Range” or “Low End” kitchen in terms quality of materials utilized in order for that property to be competitive in the market place. These costs will be remarkably similar from like property to like property. Therefore, once you estimate the cost for one “High End”, “Mid-Range” and “low End” kitchen renovation you just apply that amount to your estimated repair costs for the kitchen for each additional property.
To get a total repair cost estimate, you look at the entire property in this manner to get an estimated cost of repairing kitchens, bathrooms, bedrooms, roof, etc etc. .
Estimated cost to repair various parts of a property are available on line or through a local Real Estate Investing organization. You will need to adjust them for prices in your area. Most adjustments will be made for the labor rates. Cost of material are relatively the same throughout the United States but will vary slightly due to local markets. You can check the cost with some of the major construction supply stores like Home Depot. The first time you use this method, you will have some inaccuracies so you should apply a contingency factor. This will allow you to make errors but still not hurt yourself financially.
To boost your confidence on the repair estimates, it would also be wise review the spreadsheet of repair estimates with a trusted General Contractor in the area. They will have developed their own knowledge of repair cost for the market area. If you plan to use that General Contractor for your renovation work, then that GC will be very motivated to share information with you.
The square footage of the home would be one adjustment for repair cost you should make. The cost to repair a roof is related to square footage of the home. So is the cost for flooring, paint, trim etc. Therefore, you should have your cost spreadsheet set up so that it is easy to adjust due to square footage of the property.
Next week I will be discussing Financing Cost.