Am I paying too much for this rehab?

Question

Hey BP community,I'm currently in the planning stages of rehabbing one of my units. I've never undergone a complete rehab before so I wanted to get some input from those of you with experience. To paint an accurate picture, here are the details. The rehab is for one unit in my triplex in Knoxville, TN. It's currently an ugly 1 bed unit and is being converted into a nice quality 2 bed unit. We are undergoing renovations with the goal of upgrading tenant quality and raising rents. It's located in a solid blue collar area and is an out of state investment for me being that I live in Southern California. Because of this, my property management is going to help with organizing the rehab, and gives me peace of mind being a boots on the ground and security in knowing I don't have some random contractor running off with my money. Below is the breakdown they gave me followed by my questions about it. Building a wall and door to enclose the duct work and Hot Water Heaters - $1675Move the hot water heaters from under stairs to new room - $1265Move the washer/dryer from the laundry room under the stairs for tenant upstairs - (cutting concrete to move drain lines and installing new 220 outlet) - $3,520Remove wall in laundry. take out current door and add another door - reframe, sheetrock, - $4,180Create new bathroom with washer/dryer added, new shower/tub, new vanity, new toilet - $7150New kitchen cabinets and countertops - $4,290Move stove - new outlet - $675Replace bedroom ceiling - $715Replace pocket door in bedroom - $300Create master walk-in closet off current bedroom - $775Paint entire unit - $1300This includes labor and materials. Appliances not included.So here are my questions1. Do these prices seem reasonable to you? Is there anything that sticks out to you as out of place from a price perspective? 2. From everything I've read in books, It talks about itemizing exactly what brand/color/etc. you want of everything. Do you suggest sticking to this strategy and really being hands on from that perspective? Or should I just ask them to be more specific in what they're actually planning on using? 3. Should it always be a must to make sure the contractor is licensed, bonded, & Insured?

Victor S. · Answer

Can you get a break down of each line item of what the material/labor split is? that should paint a clearer picture.Also:"Move the washer/dryer from the laundry room under the stairs for tenant upstairs - (cutting concrete to move drain lines and installing new 220 outlet) - $3,520Create new bathroom with washer/dryer added, new shower/tub, new vanity, new toilet - $7150"looks like these two overlap a little with the washer/dryer. you're paying them $3.5k just to haul them upstairs and get the new outlet and drain? that sounds very expensive. I would assume the bathroom creation would account for drain and supply lines already. I have no idea what layout your unit has and what kind of pipe re-routing it needs, but $10.6k to do the above sounds a bit on the high side, imho.

Ritch Bonisa · Answer

@James Allen I think most of that work should come in at 17- 24k. BUT, it's hard to say - it's one of those things, I'd need to walk it myself to get a better idea. As someone else mentioned finishes and sf all the way to # of cabinets, even the vanity - all of those can change these numbers significantly. Do have @Derek Tellier go take a look if he is willing. It can't hurt. Sounds like or prices LOOK like high end finishes for a small space. I don't think my home market is all that different on rents. You want to be 800/month or above on a 2 bed. You don't want to be below that. Everyone who chimed in on this one - made great points.

Derek Tellier · Answer

I’m by no means an expert but I’ll share my thoughts. 1. Not sure if the prices would be considered reasonable but it seems like a lot of work for 1/3 of a Triplex. Sure you want to improve the property but what’s cash flow on that unit? How long is it going to take you to start getting a return on it? 2. Again just my inexperienced opinion but common sense to me is yes you should have standard products like paint color and even the brand and model of toilets you use. Will just make things a lot easier when you need to repaint or fix anything. If you don’t already have that list created this would be a good time to start it and use it in everything going forward. 3. I would ABSOLUTELY make sure the contractor is licensed, insured and has a good reputation. There are a ton of self proclaimed handymen around here. Even with a license (not that terribly hard to get here from what I’ve seen) they might not be worth a damn. So start with license then do a google search and some research before committing to anyone. Good luck if you ever want someone to stop by to give you an update on the project just connect with me and let me know. I’d be happy to be some eyes for you when I’m available. I’m just 20 Min south of downtown Knoxville.

Ritch Bonisa · Answer

How many sf is the unit? I'm thinking it might be high, but don't have enough info. One thing is that just because a line item looks high, that's not necessarily a horrible thing. Overall total can be more important to look at. All service providers are higher or lower on one thing or another. It comes down to overall costs. Your PM will obviously make a cut on this, they are in effect, acting as your GC or a project manager. Itemizing brand, color, etc. might be more work for them. You should absolutely ask them these questions. AND you should get a fairly quick response with complete answers. If you know another investor local to that area. Ask them to walk it for you, get some pictures. Make sure they are showing you what is actually there. Get photos at the end as well to make sure work has in fact been done.

John Albin · Answer

Itemizing is a must especially if you are not present. In fact, the difficulty in responding to your question about whether your costs are reasonable stems from the fact that I have no idea what specific materials or cost of materials you are using. Example: a vanity could be $200 or $1500. Cabinets and countertops range by thousands depending on materials, size, and other details. So not specifying exactly what each product is and specifications for your contractor gives them the same room to move. They can estimate $1000 for a vanity install and then find one for $300 they think is just as good and still charge you $1000. After all a vanity is you wanted. Hope that makes sense. Given the market, the only think that really sticks out in general way as a little too pricey is some of the reframing and drywall work. Unless it is more complex, I probably would be paying quite that much. But for sure your quote should be for SPECIFIC products, finishes, and detail so that you at least know exactly what you are getting

Brian Pulaski · Answer

@James Allen is this your only estimate? Is this based on a scope of work you or someone else created? I would get multiple estimates, at least one or two more minimum. Some of the numbers sound high to me, but honestly without seeing it and knowing exactly what the work is, it is hard to say.

James Allen · Answer

@Derek Tellier - Thank you for your insight and for offering to be a pair of eyes for me! I've just evicted a tenant in that unit and it is a really crappy looking unit. I know a unit that looks like that is only going to attract a low quality tenant so that's the reason for the upgrade. From an ROI perspective, I currently rent the unit for $525/month and with the 2nd bedroom and renovations, property manager thinks we can command $800/month. Based on the extra $275/month - I'm looking at about a 12.5% ROI but even if we don't command that and pull off $750/month, we're still looking at over 10% and more importantly a better quality tenant situation.

James Allen · Answer

@Ritch Bonisa - Thank you for your input! I completely forgot to mention sq footage. It is about 750 sq ft or so but will be bigger when we add the bedroom. I'd imagine maybe 900-950 when that gets added. They've been great about everything so far and provided video footage throughout explaining what they're going to do. Do you think based on that square footage, this is reasonable?