two school of thoughts when it comes to rehab

[Jason Malabute]

Question for experienced investors only.

Let's say your general contractor quotes you at $12k per unit to update interiors (paint, install vinyl floors, formica countertop, refinish cabinets, and new appliances). Also, let's say $3k per unit for exterior, common areas, and capex.

There are two school of thoughts when it comes to rehab:

1. only do deals if it still makes sense even if you do the full $12k + $3k rehab. (You will offer lower purchase price, and you'll probably won't be competitive on many deals).
2. calculate the rehab cost backwards based on a 15-25% return on your rehab based on rent bump. For example, if you are getting a $150 rent bump and want a 20% return. Then your rehab cost can only be $9,000 ((150x 12)/20%). Then you would ask your property manager if you can get away with a $9,000 rehab instead of the $15k and what interior rehab line items are a must (paint, install vinyl floors, formica countertop, refinish cabinets, and new appliances) to get the $150 rent bump?

The 2nd option will let you make a higher purchase price, but the risk is what if you under estimate rehab cost in long run.

Question:

If you are working on your first deal in today's market which rehab underwriting strategy should you go with?

[Scott E.]

You said your general contractor quoted you $12k per unit + $3k per unit for landscaping. So $15k per unit. 

If your GC quoted you $15k per unit, you can't just say "how about $9000." You need to budget for $20k per unit. There is not "getting away with $9000 rehab" these days. You'll spend half that on appliances alone.

All that being said I do understand and respect your thought process here. But if you're working on your first deal in today's market, the rehab underwriting strategy is that you need to expect it will cost 30-40% more than your contractor says it will, and expect it will take minimum 1.5x longer than they say it will take.