I have 3 newbie questions

[Cindy Shiblie]

Hi all, I'm a newbie to Bigger Pockets and have 3 questions that came out of the 90 day challenge webinar. Here they are:

-How can I estimate reno costs if I don't have a clue on prices and I don't bring in a contractor until after I buy the home? I'm so afraid to underestimate costs.

-If you do a long term rental, how do you pay back the hard money lender/private lender (if you use one)? I understand for a flip they will get a percentage of the profit, but I'm not sure how they benefit from a buy and hold. If they get a percentage of the monthly cash flow, won't that cut too much into my profit?

-What's a good monthly passive income when calculating a deal? For example, is $150/month enough to be worth it with potential maintenance costs? $200? $300? 

I appreciate all of your help and wisdom!

[Bradley Buxton]

@Cindy Shiblie

1. You can buy a turn key or a flooring and paint property to start. To start look on home dept and you can price out counters sinks flooring etc to get an idea of materials.  As you get into it you will practice getting quotes and bid for the costs. Estimating repairs can be done during the due diligence period when a property is under contract. Some contractors will bid out a job once a house is under contract.  Many times during the inspection if you can get a handyman there they give you a rough estimate of repairs. 

2. Usually you get a long term loan from a conventional lender like a DSCR loan that is based on the property income. There are many different structures for loans. Make sure the numbers work for the property.

3. The amount of monthly income will depend on your goals and the rest of the deal design. Are you appreciating at 25% per year then $150 per month doesn't sound bad for a longer term investment. It will also depend on the amount of capital you invest, if you buy in cash most properties will cash flow. It's only one metric. 

Look for local meet-ups and networking events.  Talking to local investors and others in the industry can help you get rough pricing for rehabs, loan structures, and if your cash flow calcs are accurate. Do some research on your local market and network. Keep in mind you'll never have every number that will be perfect. You'll build in some cushion if something goes wrong. 

[Jonathan Greene]

1. You can't. And you can't trust a random contractor you don't know to be accurate. And when they tell you the first cost, it will be 2x more when you start because they gave you labor costs and not materials. Basically, befriend someone with experience, read the book on estimating rehab costs by @J Scott to get a ballpark, and get reps.

2. No one should be taking a hard-money loan if you aren't flipping. Sure, you can on a BRRRR, but when you don't know what you are doing, taking 12-15 percent loans with 2-3 points is absolutely insane. And only private money should be taking a percentage of the profit at a lower rate. Your traditional hard money doesn't eat your profit, they charge you a high rate.

3. $150/month in cash flow is not something to hope for. Everyone who focus on low cash flow gets buried by adjusted taxes on turnkey or a furnace breaking. Something in every house breaks in the first three months that costs $5,000 so if you are making $150/month, you just crapped your cash flow for multiple years. Think bigger, deal find smarter.

[Bob Stevens]

Quote from @Cindy Shiblie:

Hi all, I'm a newbie to Bigger Pockets and have 3 questions that came out of the 90 day challenge webinar. Here they are:

-How can I estimate reno costs if I don't have a clue on prices and I don't bring in a contractor until after I buy the home? I'm so afraid to underestimate costs.

-If you do a long term rental, how do you pay back the hard money lender/private lender (if you use one)? I understand for a flip they will get a percentage of the profit, but I'm not sure how they benefit from a buy and hold. If they get a percentage of the monthly cash flow, won't that cut too much into my profit?

-What's a good monthly passive income when calculating a deal? For example, is $150/month enough to be worth it with potential maintenance costs? $200? $300? 

I appreciate all of your help and wisdom!

 You are NOT anywhere near ready to even look at props. Get to your local RE meeting and connect with those doing deals. 

Good luck 

[Julie Muse]

Hi there,

 As someone who focuses more on flipping, I can definitely help tackle the cost of renovations for you. Maybe give you a few pointers

### Estimating Renovation Costs

When it comes to estimating reno costs, the inspection period is the most crucial step. Here’s what works for me:

1. **Network for Referrals**: Start by attending local meet-ups or joining Facebook groups to get referrals for good contractors. Sometimes, a local realtor can also point you in the right direction.

2. **Initial Guesstimates**: Before buying a property, bring several contractors in and let them know you’re looking for a guesstimate – just a ballpark figure. This helps you get a feel for them and their pricing.

3. **Home Inspection**: Once you have a rough estimate from the contractors, decide if it’s worth paying for a home inspection. The inspection will highlight everything that’s wrong with the property, and it’s vital to fix these issues first before tackling cosmetic updates.

4. **Detailed Bids**: After you receive the inspection report, share it with your contractors and ask for a detailed bid. Make sure their bid covers everything listed in the inspection report. Be very specific about what needs to be done to avoid any surprises later.

Following this process helps ensure that you don’t underestimate renovation costs and can plan your budget more accurately. It also helps build a good relationship with your contractors, which is invaluable in this business.

Hope this helps, and good luck with your investing journey!

Best,

Julie Muse

[Mike Klarman]

-How can I estimate reno costs if I don't have a clue on prices and I don't bring in a contractor until after I buy the home? I'm so afraid to underestimate costs.

So, if you have no experience with that then I would not estimate it yourself.  Lots of times you can meet an agent in. the market that can at least put you in a ballpark.  But Generally speaking the parts of the rehab process are:

Demo/Clean out/exterior work

Mechanical/Roof

Sheetrock/Kitchen?Bath/remodel

Paint interior

Floors/rugs

Finishes

If you need the entire list that is a big job, 100k+.  Probably $90/sqft or more.  I have overseen many rehabs now.  I can tell you a bathroom let's say that is getting an overhaul: new toilet, new vanity, new tub, new tile you are looking at 8 - 10k.  For a kitchen that needs new sink, new range, new fridge, new white shaker cabinets, new granite countertops, new tile backsplash you are looking at 12k+

For LVP it is maybe 1.25/sqft and then figure another 1k - 2k for installation.

I learned first by calling and asking.  Anyone in the biz should know their price per square foot: Flooring, painting, sheetrocking, tile, they should all have a price per square foot that they can tell you.  So you look at the house and see that it is 1200 square feet, you estimate that you will need 800 square feet of LVP and you know you can get that for $1.25/sqft plus 1k installation so that is $2,500 for floors.  Anything unknown can be learned, that's with anything not just this industry.

-If you do a long term rental, how do you pay back the hard money lender/private lender (if you use one)? I understand for a flip they will get a percentage of the profit, but I'm not sure how they benefit from a buy and hold. If they get a percentage of the monthly cash flow, won't that cut too much into my profit?

So, no one is getting a percentage of the profit.  When entering a bridge loan, you are applying for a 12 month, interest only mortgage that includes escrowed funds for rehab purposes.  How do you pay that off?  99% of the time it is paid off at the closing table of the sale of the property (post rehab) or at the refinance (after you have a renter).  You'll request a payoff statement from the lender, you'll hand that to the title company handling the sale/refi and when wired funds come in from the buyer/lender financing refi funds are wired to the payoff servicer to service that loan.  The other 1% of the time people, who are liquid, can pay the loan off by doing the same thing: request a payoff statement with wire instructions and then send in the wire.

-What's a good monthly passive income when calculating a deal? For example, is $150/month enough to be worth it with potential maintenance costs? $200? $300?

You are talking about DSCR: Debt Service Coverage Ratio. What makes a good rental? When the rates were low, in the 3s, lots of houses worked as rentals. Since they have doubled it is tougher. I price out many 30 year DSCR products for people, lots of times they need to take a leverage cut to make the DSCR work if it is a single family. The SFH are not cash flowing well. If you can clear $200 per month after all costs for a SFH you are doing something special. I recommend to my clients to use the SFH markets to generate short term income and wait to catch a 2 - 4 unit property and when they pop up throw those in the portfolio. Having more than one rent payment on a single mortgage matters a lot. I helped a client get into a triplex recently. He bought it for 130k, needed 100k in work, he refi'd out at 80% with a credit union at 335k. That's 268k. His payoff for the bridge loan was 204k and that loan cost him a 26k down payment plus 8k in holding costs so that is 238k, he git 268k so now he is +30k and he has a rented out triplex at 1500 per unit (4500/month), his 268k mortgage has a 2800/month payment. He's cash flowing 1700/month. That's a solid portfolio piece. I'm not in the camp of holding to hold. I like my clients to stay liquid and rinse and repeat money constantly.

[Andrew Syrios]

Quote from @Cindy Shiblie:

Hi all, I'm a newbie to Bigger Pockets and have 3 questions that came out of the 90 day challenge webinar. Here they are:

-How can I estimate reno costs if I don't have a clue on prices and I don't bring in a contractor until after I buy the home? I'm so afraid to underestimate costs.

-If you do a long term rental, how do you pay back the hard money lender/private lender (if you use one)? I understand for a flip they will get a percentage of the profit, but I'm not sure how they benefit from a buy and hold. If they get a percentage of the monthly cash flow, won't that cut too much into my profit?

-What's a good monthly passive income when calculating a deal? For example, is $150/month enough to be worth it with potential maintenance costs? $200? $300? 

I appreciate all of your help and wisdom!

 1) Contractor bids are a good way, although that's only after you are fairly far along. Reading J. Scott's book on estimating renovation costs is a good way to learn. Also, make sure to add a contingency (I do 20%) for unforseen and add in expected holding costs.

2)  The best way to pay back a hard money lender is to refinance with a bank to get long term debt. This is why it's important to get a good deal with built-in equity but also why it's hard these days with rates as high as they are.

3) It's very different with and without debt. $150 is pretty tight (for a house) but if you're including recurring capex, I think it's alright these days with rates as high as they are.

[Cindy Shiblie]

Quote from @Bradley Buxton:

@Cindy Shiblie

1. You can buy a turn key or a flooring and paint property to start. To start look on home dept and you can price out counters sinks flooring etc to get an idea of materials.  As you get into it you will practice getting quotes and bid for the costs. Estimating repairs can be done during the due diligence period when a property is under contract. Some contractors will bid out a job once a house is under contract.  Many times during the inspection if you can get a handyman there they give you a rough estimate of repairs. 

2. Usually you get a long term loan from a conventional lender like a DSCR loan that is based on the property income. There are many different structures for loans. Make sure the numbers work for the property.

3. The amount of monthly income will depend on your goals and the rest of the deal design. Are you appreciating at 25% per year then $150 per month doesn't sound bad for a longer term investment. It will also depend on the amount of capital you invest, if you buy in cash most properties will cash flow. It's only one metric. 

Look for local meet-ups and networking events.  Talking to local investors and others in the industry can help you get rough pricing for rehabs, loan structures, and if your cash flow calcs are accurate. Do some research on your local market and network. Keep in mind you'll never have every number that will be perfect. You'll build in some cushion if something goes wrong. 

 Thanks Bradley, this is really helpful!

[Cindy Shiblie]

Quote from @Mike Klarman:

-How can I estimate reno costs if I don't have a clue on prices and I don't bring in a contractor until after I buy the home? I'm so afraid to underestimate costs.

So, if you have no experience with that then I would not estimate it yourself.  Lots of times you can meet an agent in. the market that can at least put you in a ballpark.  But Generally speaking the parts of the rehab process are:

Demo/Clean out/exterior work

Mechanical/Roof

Sheetrock/Kitchen?Bath/remodel

Paint interior

Floors/rugs

Finishes

If you need the entire list that is a big job, 100k+.  Probably $90/sqft or more.  I have overseen many rehabs now.  I can tell you a bathroom let's say that is getting an overhaul: new toilet, new vanity, new tub, new tile you are looking at 8 - 10k.  For a kitchen that needs new sink, new range, new fridge, new white shaker cabinets, new granite countertops, new tile backsplash you are looking at 12k+

For LVP it is maybe 1.25/sqft and then figure another 1k - 2k for installation.

I learned first by calling and asking.  Anyone in the biz should know their price per square foot: Flooring, painting, sheetrocking, tile, they should all have a price per square foot that they can tell you.  So you look at the house and see that it is 1200 square feet, you estimate that you will need 800 square feet of LVP and you know you can get that for $1.25/sqft plus 1k installation so that is $2,500 for floors.  Anything unknown can be learned, that's with anything not just this industry.

-If you do a long term rental, how do you pay back the hard money lender/private lender (if you use one)? I understand for a flip they will get a percentage of the profit, but I'm not sure how they benefit from a buy and hold. If they get a percentage of the monthly cash flow, won't that cut too much into my profit?

So, no one is getting a percentage of the profit.  When entering a bridge loan, you are applying for a 12 month, interest only mortgage that includes escrowed funds for rehab purposes.  How do you pay that off?  99% of the time it is paid off at the closing table of the sale of the property (post rehab) or at the refinance (after you have a renter).  You'll request a payoff statement from the lender, you'll hand that to the title company handling the sale/refi and when wired funds come in from the buyer/lender financing refi funds are wired to the payoff servicer to service that loan.  The other 1% of the time people, who are liquid, can pay the loan off by doing the same thing: request a payoff statement with wire instructions and then send in the wire.

-What's a good monthly passive income when calculating a deal? For example, is $150/month enough to be worth it with potential maintenance costs? $200? $300?

You are talking about DSCR: Debt Service Coverage Ratio. What makes a good rental? When the rates were low, in the 3s, lots of houses worked as rentals. Since they have doubled it is tougher. I price out many 30 year DSCR products for people, lots of times they need to take a leverage cut to make the DSCR work if it is a single family. The SFH are not cash flowing well. If you can clear $200 per month after all costs for a SFH you are doing something special. I recommend to my clients to use the SFH markets to generate short term income and wait to catch a 2 - 4 unit property and when they pop up throw those in the portfolio. Having more than one rent payment on a single mortgage matters a lot. I helped a client get into a triplex recently. He bought it for 130k, needed 100k in work, he refi'd out at 80% with a credit union at 335k. That's 268k. His payoff for the bridge loan was 204k and that loan cost him a 26k down payment plus 8k in holding costs so that is 238k, he git 268k so now he is +30k and he has a rented out triplex at 1500 per unit (4500/month), his 268k mortgage has a 2800/month payment. He's cash flowing 1700/month. That's a solid portfolio piece. I'm not in the camp of holding to hold. I like my clients to stay liquid and rinse and repeat money constantly.

 Thanks so much Mike.Your response was incredibly helpful!

[Cindy Shiblie]

Quote from @Julie Muse:

Hi there,

 As someone who focuses more on flipping, I can definitely help tackle the cost of renovations for you. Maybe give you a few pointers

### Estimating Renovation Costs

When it comes to estimating reno costs, the inspection period is the most crucial step. Here’s what works for me:

1. **Network for Referrals**: Start by attending local meet-ups or joining Facebook groups to get referrals for good contractors. Sometimes, a local realtor can also point you in the right direction.

2. **Initial Guesstimates**: Before buying a property, bring several contractors in and let them know you’re looking for a guesstimate – just a ballpark figure. This helps you get a feel for them and their pricing.

3. **Home Inspection**: Once you have a rough estimate from the contractors, decide if it’s worth paying for a home inspection. The inspection will highlight everything that’s wrong with the property, and it’s vital to fix these issues first before tackling cosmetic updates.

4. **Detailed Bids**: After you receive the inspection report, share it with your contractors and ask for a detailed bid. Make sure their bid covers everything listed in the inspection report. Be very specific about what needs to be done to avoid any surprises later.

Following this process helps ensure that you don’t underestimate renovation costs and can plan your budget more accurately. It also helps build a good relationship with your contractors, which is invaluable in this business.

Hope this helps, and good luck with your investing journey!

Best,

Julie Muse

 This is very helpful, thank you Julie!

[Cindy Shiblie]

Quote from @Bob Stevens:

Quote from @Cindy Shiblie:

Hi all, I'm a newbie to Bigger Pockets and have 3 questions that came out of the 90 day challenge webinar. Here they are:

-How can I estimate reno costs if I don't have a clue on prices and I don't bring in a contractor until after I buy the home? I'm so afraid to underestimate costs.

-If you do a long term rental, how do you pay back the hard money lender/private lender (if you use one)? I understand for a flip they will get a percentage of the profit, but I'm not sure how they benefit from a buy and hold. If they get a percentage of the monthly cash flow, won't that cut too much into my profit?

-What's a good monthly passive income when calculating a deal? For example, is $150/month enough to be worth it with potential maintenance costs? $200? $300? 

I appreciate all of your help and wisdom!

 You are NOT anywhere near ready to even look at props. Get to your local RE meeting and connect with those doing deals. 

Good luck 

Agree! I'm on day 1 so I'm just getting my feet wet. Off to find REI meetings near me!