5 Key Factors of Rehab Budgeting

So for rehab, budgeting, the second kind of line of defense is you want to focus your money on the kitchens and the bathrooms. That is definitely your best bang for your buck. Even though the systems are most expensive, it is an area that isn't sexy. But where you get into the, you know, the nice looking parts of of the property when you do redevelopment are kitchens and bathrooms.

Again, breaking that up into the small, the medium, and the large is gonna be a really effective way to budget for each individual system. Welcome to raising the flipping bar. My name's Derek Marlin, and I've redeveloped over 80 properties in metro Denver. I've bought and sold 115 multi-family doors in Cincinnati, Ohio, and my team has done just under 300 single family rental acquisitions for our clients on this show.

My goal is to help you make more money, save you a bunch of time, and create a well-oiled flipping machine. Let's dive in and if you want more information, head to fix and flip.show investors. Welcome back to Raising the Flipping Bar. We're gonna jump into rehab budgeting, so you're gonna wanna stay for this entire episode.

There's so many different nuggets of information and tips and flip. Tips and pro tips that we're gonna give you to make sure that you are properly budgeting for your renovations. So again, as a quick recap, before this episode, we talked about finding the right general contractor. And a couple key things you want to do is have them actually fill out a questionnaire in advance to make sure that you are the right match, both for a skill level, from a budget perspective, and that you guys can actually work together.

Definitely gonna wanna make sure you go over your strategies and your processes so that you're on the same page and sign agreements. I know it's something that people always forget and it just gets you into so much headache and heartburn in the future. But definitely sign agreements and then long-term pull those relationships.

If you can rinse and repeat and do a bunch of projects with one general contractor, that's gonna make your life so much easier. So once you get that gc, once you have figured out which contractor you want to use and vetted that person properly, we're gonna get into rehab Budgeting. Um, gonna give you a couple of top line considerations because what I want people to do is to be able to do what we call five minute math.

We've talked about that in a prior episode. So you can, you know, evaluate deals very, very quickly. So on average, when we're budgeting for renovations, just the simple quick napkin math and the top level of our spreadsheet is we're spending $40 per square foot to do cosmetic renovations. And so that's not doing major systems, that's not finishing basements, that's not doing structural repairs.

40 bucks for kind of, you know, the, the cosmetic, um, carpet paint, new kitchen fixtures and finishes. Just stuff you can get in and out of relatively quickly. The next line is when you're doing full rehabs, you're gonna be spending about $65 per square foot, and as we mentioned other episodes, that is you doing two to three different systems.

So roof and windows, sewer line, and electrical panel. Structural repairs, about 65 bucks per square foot. Then we wanna also break it up when we're doing quick budgeting into categorizing your houses into small, medium, and large. And so for those of you that take our academy, we actually have this broken out on one sheet of paper, but you can quickly budget that specific, um, price point for each different property.

But small properties are kind of your condos, your townhomes. Roughly 1000 square feet and below medium is 1000 to 2000 square feet. And so that's your single family homes, your larger town homes, your ranches with a basement large is, you know, kind of that 2000 to 2,500 square feet and above that gives you that best ability to quickly budget for these renovations and make sure that you're spot on.

The other big thing that when we talk about from a pricing perspective, is the $65 a square foot that will actually incorporate labor and materials. You can get nitty gritty and weigh in into the weeds and do tons of details to budget every individual aspect of the property. But normally it's gonna take you three hours to walk a property and somebody else is probably gonna buy it before then, or you're just gonna spend so much time.

It's just, it's, it's not scalable. So these costs are labor and materials. The other big thing is don't improve for your arv. And again, ARV stands for after repair value or how much are we gonna sell this thing for in the backend? Don't over improve. If you are putting out a product in, in Denver, the median home price is right around $650,000 plus or minus a little based on, you know, what our current market conditions are.

You don't need to make it look like a million dollar house. I know you might want to do it. Your significant other might want to do it. Your business partner might want to do it, but make it sure that your renovations are spot on for whatever price point you're going to. Um, but then also don't cheap out.

Don't make it look like a $300,000 condo. Um, the last thing is, is you really want to think about ideally scaling up, building those relationships with contractors. These numbers that we're talking about, they're gonna be truly investor pricing. It's not gonna be the pricing that we get today because we're a, a pretty decent size company and we're doing a lot of volume, but it's also not when I very first started where you're kind of getting off the shelf retail type of pricing.

So think if you're just doing a search for. Replacing a hot water heater and you call the first person on Google, you're probably not gonna get the best pricing. So this is really kind of geared towards investor pricing. Now we're gonna jump into the five different ways that you need to budget from a renovation standpoint.

And actually number one is start with the major systems. I know when people walk through houses and it looks great on H G T V. It looks good when you're, you know, working with other investors or, or I should say, actually being maybe a competitor with other investors, and you're at the same property and everybody's walking around.

You need to work on the major systems, focus on the major systems from a budgeting standpoint. So number one, structural problems. Are there cracks in the foundation? Are there walls that are sagging? Are there, um, you know, just overall structural issues with the grading of the property. That is typically your number one price point of what you're gonna spend your money on.

And for kind of standard structural problems in Metro Denver, you're spending eight to 12,000 bucks. No problem. To fix some of those problems. If you're doing major structural repairs, you're $25,000 and significantly higher. So the takeaway on this is don't go into a kitchen and count how many kitchen cabinet you know, pulls that you're needing to put in the property.

Worry about 20, 30, $40,000 structural issues. After that, you want to jump down to roof. Um, probably shouldn't say jump up to roof, um, but you definitely wanna look at roofs. You're gonna spend anywhere from six to $12,000 on putting new roofs on properties. Ideally that is taking off one old layer of shingles.

The decking underneath is still in good shape. You're gonna spend more. If you take it off and you've got four layers of shingles and all the decking, which is the plywood underneath is completely rotted out, you're gonna be spending more money. But think of it from, um, you know, you gotta replace a roof.

Normally roofs give you the ability to be 10 to 20 years. Um, if it is on that end of the, the life cycle, you're gonna need to replace your roof. Beyond that, we jump to windows. We count all the windows. Kind of another pro tip is to count the windows from the outside of the property. Cuz sometimes when you're inside, you walk around and you kind of actually lose your train of thought or, or your sense of direction and where you are.

So count all the windows from the exterior of the home and we break those up also into small, medium, and large. For the windows. Again, simple, simple, quick kind of napkin math is you're spending anywhere from 400 to $800 per window. For labor and material for small, medium, and large, those bigger custom windows are definitely gonna cost you a lot more.

And, um, egress windows is another one that gives you tons of value. And what an egress window is, is think of the basement bedroom. And it's got your little teeny window that we all grew up in, in the seventies, eighties, and nineties, where for whatever reason, everybody was fine with us living in the basement at that point.

Now you've gotta have a window that you can actually get out of or a firefighter can get into. So you're cranking the window open and you're able to get out of that window. Um, our investor pricing is normally around 3,300 bucks to do that. But it actually adds tons of value cuz it gives you the ability to have a conforming bedroom where you need an egress window and a closet.

So count those windows. That adds up really, really quickly. Um, that pricing is typically inclusive of double pane windows. Um, then we jump down to HVAC systems. So think of your furnace, your boilers, your hot water heaters. Those good lifespan and longevity is about five to 10 years. If they're older than that, we a hundred percent replace 'em.

Um, I know it sounds painful, but hot water heaters, they're really reasonable. They're normally on average, about 1500 bucks for hot water heater unless it's one or two years old. I also budget to replace those, cuz you gotta think on the back end. What's gonna come up at inspection. So do the hot water heaters, furnaces.

Boilers, you're gonna spend between five and $8,000 and this is really where you're just taking the old product out and you're putting the new product in. It does not take into account doing new duct work, completely finishing out a basement, moving things realm. You're gonna add a significant amount of money to your budget, which is always doable.

You just gotta know that on the front end. Um, definitely electrical panels are something that are important from a health and safety perspective and are are not inexpensive. On average, we're paying, um, you know, about 3,500 to $4,000 per panel. And something else you wanna look for is, there's three brands that are significant fire hazards.

Which ironically, you actually shouldn't even get insurance on these properties, but a lot of times people don't go in and check these. So if you see a panel that is a federal Pacific panel, that's definitely one that's a fire hazard and you're gonna wanna replace. There's also a sub-brand of that, and it's called stab lock, S T A B L O C.

And the third one is called ZinCo, Z I N S C O. Those are three brands that when you see those, when you enter, um, into a home, go to the backyard and see if you can find that type of brand. From an electrical panel standpoint, you've got a budget to replace those. Sometimes it obviously doesn't have the label on the panel, so if you've got mismatched color breakers and they aren't all black and they don't look, uh, relatively new, there's also an indication that maybe they put a different cover on it.

But you've probably got one of those panels where maybe there's some fire damage. And some hazard there. So definitely dive into electrical panels. Um, the other big piece of the puzzle from a systems perspective where you're spending all this money is asbestos in Colorado, there's actually more asbestos in some of these properties than you might think.

And really, asbestos is pretty prominent from starting as early as the 1950s. Even through the 1980s, they didn't figure out how bad that material was until the 1990s and stop putting it into production for the most part. So just in general, if you're buying a home between the fifties and the eighties, there's uh, potentially the option, um, for asbestos in these properties.

And the three areas that you wanna look for is if you've got that popcorn looking material on the ceiling. A lot of times that has asbestos in it. The two telltale signs where, you know, you've got asbestos are the duct work for the heating system, if it looks like there's white, um, not electrical, but athletic tape on the back of those and, and wrapped at the joints.

And then normally where it connects to the vents in the flooring, um, that's definitely asbestos. So you've gotta spend money to remediate that properly. The other thing is, is when you take up the carpet and sometimes you can't see this, but you kind of wanna still budget for it. And that's if the tiles are nine inches by nine inches and it's the old school linoleum that it all looked like in our elementary schools, there's probably asbestos in that too.

So there's certain ways that you can contain and remediate those. But again, you're talking several thousand dollars. So to properly take out that duct work, if it's not everywhere, you're talking a couple thousand bucks. If you need to do, um, kind of that mid-range remediation, you're talking five to $6,000, or if you've got it everywhere or it's in the popcorn ceilings and they've got to.

Essentially close down, you know, the work site and vent it properly. You're talking 10 to 15 to $20,000. So, um, before we get to the last part, which is essentially sewer lines, I really want to tell people that again, in general, you're spending roughly 60% of your budget on all these structural components.

So as much as we love how kitchens look, how bathrooms look, you know, the gazebo you want to build in the back, focus on the systems. Um, so then at that point you've seen everything above ground. You then want to kind of go below ground and you want to scope the sewer line. In general, we 100% spend. You know, you're gonna spend a hundred bucks, 125 bucks to do a sewer scope.

Even if I look at 10 properties that I get close to the finish line and I don't buy 'em, and I've spent a thousand dollars, that's going to far surpass the amount you're gonna spend on a sewer line that you don't catch. So, sewer lines in general, you're gonna spend a couple thousand dollars to do a repair for one section of the pipe.

You then jump up to replacing a line from where maybe it exits the property and is in a, a central Denver home where it goes, um, not too far back out to the alley or to the front yard. You're gonna spend again, five, six, 7,000 bucks or do a full sewer line replacement. You're spending between 10 and $15,000 for the sewer line itself, and then the tap of where it connects to the main line in the, uh, front yard, um, or going out through the front yard or in the back alley.

So again, this is all expensive stuff. You gotta really figure that out first before you jump into level two. Hey investors, thank you so much for listening to today's episode of Raising the Flipping Bar. I'm Derek Marlin, your host, and today sponsors the Elevation Academy. The Academy is an intensive one day training session where we teach you every single step of our system to increase your profits, find great properties, save you time.

Avoid cost and mistakes. Essentially, it is your roadmap and it's 105 step system to your fix and flip success blueprint. So sign up today. We've got an academy coming up in a couple weeks. We only are taking 20 guests and we've actually got a money back guarantee. So if you try our system, you put in the old college try and you don't find it's the right benefit, we'll refund every penny of your money.

But we'd love to have you join us for the Elevation Academy. We've got info in our show notes and we'd love to have you join us. So for rehab, budgeting, the second kind of line of defense is you want to focus your money on the kitchens and the bathrooms. That is definitely your best bang for your buck, even though the systems are most expensive.

It is an area that isn't sexy, but where you get into the, you know, the nice looking parts of, of the property when you do redevelopment are kitchens and bathrooms. Again, breaking that up into the small, the medium and the large is gonna be a really effective way to budget for each individual system. The other area of what we do is normally, um, you can also open up kitchen walls.

And so if they're non load bearing, which means they don't need to carry support from the, you know, the roof down or the basement up, then you can open that up and give people that open concept for the kitchen. So definitely work through your contractor to figure out if that's the right fit for that specific property that you're working on.

The other area that we kind of divide kitchens into is cabinets. Countertops, backsplash. Are we gonna open that wall up or not? And then the appliances. So on average, if we take those six pieces of the puzzle into play, for a normal size kitchen, again, kind of that 2000 square foot, four bedroom, three bathroom property, we're gonna spend on average between about 18 to $25,000 to do new a new kitchen.

Um, that does not include flooring. Flooring kind of gets put into another budget item. Let's, we'll talk about here in a minute, but it's kind of everything from the flooring up. And again, think investor pricing, not if you called a kitchen and bath company and we're doing something in, you know, the Highlands Ranch neighborhood and in South Denver, you're gonna spend a lot more money in that.

But again, don't over improve for your specific price point. So once you've gotten the kitchens and bathrooms dialed in, um, you typically want to jump into fixing up the bedrooms and then going into the flooring. So you really want to take a laser measure when you walk these properties as well. So ideally, you've got your one sheet of papers so you can do all your circles and all your tally marks of how much money you're gonna spend on these properties.

But you need to measure out the bedrooms, measure out the bathrooms so that you can figure out how much you're gonna spend on flooring. Um, we typically look at, at what we're gonna spend, it's called above grade, which means first story, second story. Uh, below grade means subterranean. Or in Colorado, we've obviously got basements.

And then we normally spend from a flooring perspective, we focus on three different areas. Um, actually four. We do L V L, which stands for luxury vinyl laminate, so that's that nice laminate that you can find. We do a lot of our purchasing from floor and decor. Again, great products, readily available, don't over improve.

Um, and those are the ones that click together, give you great durability. And if you make those look consistent, so let's say you walk in your main, um, you know, front door, you've got a living room, you've got a dining room, you've got a kitchen, run that stuff throughout because it makes your properties look significantly bigger.

Then you've obviously got tile. So we do tile in our properties a lot of times on kitchen floors. We do tile for the backsplash in the kitchens, and then of course in the bathrooms on the floors and in the showers. Um, if you've got hardwoods, definitely save them if you can. If they're not too terribly beat up, we try to refinish hardwoods and put a nice new stain on them.

Um, definitely a lot of value. People typically love hardwoods. And then what you're gonna do in a lot of bedrooms, and certainly in basements, you're gonna do carpet. So again, depending upon the specific material. And where you're putting 'em for labor and material, you're spending anywhere from five to $15 per square foot.

So that vinyl, um, you know, is gonna be on the lower end. The hardwood and the tile is gonna be a little bit on the high end, but again, don't over improve for your a R v. Then you get into the cosmetic elements, which I know is kind of counterintuitive. People think about the fun things that people wanna see.

Yes, that does help sell the house. But it's those three or four levels beyond that, um, that really help you get maximum return on investment. So then we're talking about paint. We always budget to paint the interior and the exterior. We almost never, even if somebody, you know, you're working with a seller or real agent and they say, oh, it's freshly painted.

It's not the color of the widest buying audience that your clientele wants. So even if it's really nice paint and you bought it from Sherman Williams, you've gotta go with three or four different, very kind of neutral paint colors. And again, take your personal preference out of it. Um, on the interior, we're spending anywhere from three to $7,000 to paint an entire home.

And then we also ret texture typically. So a lot of times you'll have people that have done DIY improvements and the kitchen might be an older texture style than the living room, and it might be different than the bathroom. You gotta make sure that there's consistency, in my opinion, and we ret texture everything on almost every property unless it looks essentially brand new.

Um, we also get into, we do new doors, we do new baseboards, um, and then we do new door casing around the doors. So again, unless things are in phenomenal condition, you're gonna spend anywhere from three to 500 bucks per door, labor and materials. Um, and then when you're doing your base, in your case, it's, it's measured on a linear foot.

So you're gonna spend anywhere from two to $4 per linear foot, or if you were walking it out, how long? That measurement is so you, you wanna make sure you're taken that into account, cuz that can be, again, a couple thousand dollars. And if you miss these things, you add up three or four of those areas, a couple of thousand dollars a piece.

Again, that takes you from a 14% ROI to a 7% ROI like overnight. So do not, um, neglect kind of being detail oriented in your budget. Last thing is again, we go to the outside of the property. So we have already looked at the electrical panel, we've looked at it from a structural perspective. We typically paint everything.

Um, I know there's probably some purists out there that probably cringe at ad hearing this, but. Brick unless it's re in really good shape and it is kind of that, that beautiful old world charm of traditional red brick. We do paint brick a lot cuz it just gives such good pop and such good kind of curb appeal.

Um, definitely siding we paint when you paint siding. Um, man, I learned this the hard way. There has to be specific style of paint and it's far more expensive. When you're painting vinyl siding. So I actually did one when I very first learned, and again, this is me learning the hard way and hopefully, um, giving you these tricks of the trade to, to not run into this train rack of a problem.

But we painted it or we had a contractor paint the siding and the heat just baked that siding and it literally looked like bacon. The next day. It was all ribboned up. It was a hot mess, it was a disaster. And I essentially had to rip off all the siding. And put new siding on. So that was, uh, an $8,000 mistake.

So if it is, uh, lap siding or particle board siding, you can use traditional paint. But if it's that vinyl siding, you've gotta spend more money to have your contractor make sure they're using the right kind of paint. Landscaping, do not neglect landscaping. Again, from the outside in when you're walking up to the front door, you want that classic curb appeal that people are looking for.

So you want to make sure you have the yard completely cleaned up. Um, in higher price points, you wanna make sure you've got either new sod or sprinkler systems that work really well. So that's nice and green during, you know, the spring and the summer months. Um, for wintertime we also try not to over improve, cuz a lot of times in Colorado we want kind of what we call clearly defined lines.

So you want the art totally cleaned up. You want edging throughout the yard front and back. You want mulch put down, but don't spend a bunch of money when it's probably gonna snow the next week. Um, so make sure you reinvest in landscaping. We're spending on average 5,000 to $15,000 to landscape a property.

And again, if you think back a couple episodes, our sweet spot is selling stuff between roughly 300,700 $50,000. We did a couple properties that ran up into the millions and we spent anywhere from 20 to $25,000 on landscaping. But again, you could easily spend a hundred thousand bucks on landscaping. So again, be careful with your arv, but do not neglect landscaping.

Um, sprinklers, you're gonna be spending around $1,500 to do tune-ups and repairs. If you're doing a brand new system, you're gonna spend five to $6,000 putting in a brand new system, depending upon how many zones that you're putting in for your specific property. Again, don't over improve. And then once you're under contract, do the sewer scope and do the roof inspection.

So you can pretty much see everything relatively well when you're doing your rehab budgeting. Um, we've got a great partner that we work with, and the company actually does both of those at one time. So they'll do a sewer scope, which again probably cost me 125 bucks a roof inspection, so I'm all in for $200.

That saves you so much money over time because then you can go back to the seller and say, Hey, I love your property. I still wanna buy it, but here's the video of the sewer line. And unfortunately, there's a giant crack or it's shot, or it's disconnected from the tap. So it helps you say, we wanna buy it, we just need it for X dollars less.

And it's typically a win-win. Um, once you give them that information, they're supposed to disclose it to other people too. So it truly is kind of a win-win. So you, you're, you're basing your decisions on fact and not just kind of gut reaction. Um, so again, we could go way deeper. We will in future episodes on how to budget from a rehab perspective.

I remember when I first started, it probably took me about two hours to really walk through each individual property, get all the details. Now we've got it down to we can be in and out in about 45 to 60 minutes. The other thing we do is take a video. There's always things that you'll forget about, or a lot of times when you're interacting with sellers, they're gonna, you know, tell you about, you know, their life experience in that house, or what happened to little Johnny or Susie, you know, when they were growing up in their bedroom or whatever.

1. You want to be sensitive to that, but don't let it kind of take you off track and, and have you miss certain things cuz that's gonna cost you a lot of money. So just take a video, go back afterwards and just double check your numbers. Um, kind of final thoughts as we wind down this episode. Detailed budgets are huge for your lenders as well.

So for you to get your private loan or your hard money loan, you have to supply these budgets to your lenders. So just do it right and do it up front. It also sets the stage for you giving, um, the proper pricing to your contractors. Um, and then again, think about it from a, a strategy of pricing where we are using general contractors.

You could obviously save some money doing the work yourself. I will always kind of argue that of how fast can you turn your money? You know, remember that term velocity of money, but this pricing I just told you about, it includes typically having a general contractor do all of the work and their subcontractors do the work, you know, below them if you will.

Um, kind of the last thing is, is, is update your pricing. Often we are our, our rehab pricing budget sheet. Is on version five. So we're essentially updating this sucker sadly, every three or four months. Um, with the current market change and the environment of just how things, especially through Covid, materials went through the roof.

Labor definitely got expensive. We're seeing labor come down a little. We're seeing materials come down a little, but not much. We're not going from 65 back down to 40. We're maybe going from 65 to 60, and that's about it. So to kind of conclude this episode, definitely attention to detail. Take your time.

Do not over improve. Uh, definitely reach out to us. Again, we want you to connect and engage with our team. Share your wins, share your losses, um, share your vendors. We're happy to a lot of times, you know, share some of these vendors so we can help everybody. Um, keep your rehab budgets in a manageable standpoint.

And then lastly is we're gonna probably give, uh, our deal analyzer and also our rehab budgeting sheet away to two lucky folks that contact us. Um, we also teach a fix and flip live class, and so if you reach out to us as well, um, we're doing this kind of training live at our fix and flips today as we speak, so definitely connect with us.

Thank you so much for tuning in to raising the Flipping bar. I'm Derek Marlin, your host, and I'll catch you on the flip side. Thank you so much for listening to Raising the Flipping Bar. My goal is to help you successfully and profitably redevelop properties in competitive markets, and I encourage you to listen to some other episodes on this podcast.

If you're a new investor, make sure you subscribe or follow raising the Flipping Bar on your favorite podcast platform. And make sure to share this episode with someone you know would enjoy it. Head to fix and flip.show to stay up to date with future episodes of raising the flipping bar. My name's Derek Marlin, and I'll catch you on the flip side.