The rehab is now underway on our investment property. As you might recall, my brother and I bought a HUD home that we are flipping. The plan is to have the house on the market over the next few weeks.
In order to determine if this was a good investment we had to consider three major factors. The cost of the house, the cost of the rehab, and how much we could sell the house for.
We bought the house for $46,051 with no additional fees because this was a cash deal. We estimated $20,000 for the rehab and we think we can sell the house for $110,000. Let’s take a more in-depth look at these details.
Cost of Rehab
One of the main factors in deciding to buy this house was the cost of the rehab. The numbers had to make sense and we had to determine just how much we were going to spend to “fix” the house. The key to whether this was a good investment really depended on how much the rehab was going to cost.
If you’ve never done any sort of home rehab I would suggest making friends with a contractor or someone who can help you pinpoint the cost. Luckily, I’ve been doing these types of rehabs for others and as a result, I have a pretty good eye as to what needs to be done and how much it will cost. I also have the good fortune of having a realtor/mentor who has rehabbed over 600 homes in the area. We worked together to come up with the estimated rehab cost. Here it is:
Labor is expensive and certainly needs to be addressed here. The only way I am able to estimate the numbers above is because all of the labor will be done by my younger brother and me. This is a huge savings. Often times, the cost of the labor involved will double your overall cost.
The numbers you see are an estimate and I do expect some of them to change. Anyone who has ever taken on any sort of remodeling project knows there will be surprises. It’s inevitable that you will find things that you didn’t know were going to be there. The best thing to do for this is to figure it into your budget as I have done with the Misc category. There are those unforeseen issues that turn into costs and we did our best to account for these things ahead of time by building extra money into the budget.
Kitchen and Bathroom
In a small house the kitchen and bath become even more important. This house has only one small bath and a kitchen that’s not very big either. Most of the houses in the area are about the same size and many have the same exact floor plan. There’s no doubt that these two rooms can really make the house stand out from the competition. Don’t tell my investor this (Rob), but if there’s one place we are going to go over budget it’s going to be in these rooms.
Kitchen: With the size of this house I know the kitchen has to be top-notch for the area. We estimated $3,500 for a kitchen. This might not sound like much, but keep in mind my younger brother and I are doing all the work which is a significant savings. I also get cabinets and other products at wholesale which really saves us money, too.
The plan for the kitchen is to tear everything out and start over. The new kitchen will include a new floor plan, cabinets, appliances, counter top/sink, tile back splash, flooring, recess lighting, new plumbing and new electric box.
Bathroom: With there being one bathroom in this house this bathroom needs to be spectacular. To make this happen we will also be tearing everything out and replacing it with new material.
We will be tiling the bathtub surround with a good quality ceramic tile, tiling the floor, and adding crown molding. Since this bathroom is small we are even adding a pocket door so the entry door doesn’t have to open up into the already small space.
Selling the House
There are a few things we used to determine just how much a buyer would be willing to pay for the house. The first thing I did was have my realtor pull the comps for houses in the same area that recently sold. We specifically looked for houses in the same neighborhood with a similar floor plan. We compared houses with carports, and houses with garages because our plan is to change the carport into a garage. With the help of our realtor, we reviewed all the details so we could come up with what we thought was a realistic sale price for our house. That price landed right around $110,000.
Just to review, here’s a breakdown of what we are expecting:
- Purchase Price: $46,051
- Estimated Rehab Cost: $20,000
- Estimated Sale Price: $110,000
If everything goes as planned, we will have put $66,051 into the house and get $43,949 out of it if we are on point with what we’ve estimated. There are fees to take into consideration too, like realtor fees, which will eat into our profit.
Stay tuned because over the next couple weeks I will be sharing all the fun surprises we’ve encountered with the house and just how close to budget we are.