Is the "rule of 5" reliable?

Question

BP,

I went to a seminar last week and I heard a little trick that some people do to quickly access repair costs. He called it the "Rule of 5." The basic premise is, you add $5K for each major repair the property needs and if you have five items, add another $5K to the tally to cover yourself.

Makes sense? Very simplistic, I know, but you need simple when you are trying to don't have much experience with this stuff and you need to make a quick decision.

Anyone elver heard of it? You think it could be a reliable way to ballpark a repair estimate?

Wendell De Guzman · Answer

No - in 13 years investing in real estate I have not encountered such a rule. It's quite an absurd rule and will not work in many cases. Be careful of these gurus.

For instance, roof replacement is not $5,000 - depending on the size of the house, it can be $4,000 or $7,000 or $20,000. There are "rules of thumb" though if you want to quickly estimate repairs. The rules of thumb below generally works with houses between 1000-2000 sqft: (in more expensive markets these rules don't work)

Cosmetics (paint, carpet) - $5,000

Remodel kitchen & bathroom - $10,000

HVAC + new AC condenser - $5,000

Replace roof and sidings - $10,000

Update electrical and plumbing - $6,000

Then you can add a 20% buffer on the total repair estimate based on these rules of thumb.

ONLY use these rules of thumb when prescreening properties. Always verify the actual repair cost using a good GC working off of a detailed Scope of Work.

Denny Troncoso · Answer

Hi @James Danchus I have heard of the rule of $5k in the sense that when you do your due diligence for repairs and arrive at $13k round up to 15k or if 17k in repairs round up to 20k. Its more of a contingency fee in that case. An easy thing you can do is get some trades out there to estimate the repairs of course a GC would also be good if its a big job. Try using angies list to find trades and pay the nominal fee they charge for the inspection. Meet them at the property and follow them around and ask questions. If you do that enough times the numbers will start to click. Good luck!

Ned Carey · Answer

@James Danchus

When you start you may very well have to spend an hour or more doing an estimate. That is how you learn. You are not going to do an estimate over the phone anyway. You need to see the property.

If you have a truly motivated seller you may not need an estimate of repairs at all. Sometimes they will throw out a price so low you know it will work. If you come to verbal terms over the phone you have no legal commitment. You can always renegotiate when you see the property.

I as often as  not don't do a repair estimate when wholesaling. I just look at what REOs are selling for and figure the Floor price for the area.

Vince Mayer · Answer

@James Danchus

In the search box above enter "J Scott's Book" or:

The Book on Flipping Houses and The Book on Estimating Rehab Costs

Crystal Smith · Answer

The basic premise of having some rules of thumb to get a ballpark for repair is sensible, but the rules are dependent on market location; (Repair Cost in St. Louis are different than Chicago, LA,.....); property type (Is your market strategy a rental or is it a basic 1st home owner property or are you doing a move up property or maybe a luxury home,....)  I wouldn't use the "Rule of 5".  It would be worth it to invest some time to develop/understand your local rule of thumbs for Kitchen, bath, mechanical, roofing, demo, plumbing & electrical, drywall/painting...

Frank S. · Answer

Get J Scott's book on repairs.  That is really bad advice, you will get into trouble.

http://www.amazon.com/Book-Estimating-Rehab-Costs-...

Wes Brand · Answer

Just as a point of reference supporting your point: In SF a 'quick estimate' for a kitchen or bath remodel is 30k for basic finishes and appliances, or 50k for what you'll probably end up having to put in. You'll likely be able to do it for less, but those are decent "no knowledge" guesstimates.

Joey Nakayama · Answer

Yikes. Just the notion that "major repairs" can somehow be considered a single category with an approximate price tag makes me scared for everyone who attended that seminar.

I've walked away from two multifamily deals in the last two years because of "major repairs". Roof & parapet replacement and rear enclosure reconstruction in one, major foundation issues in the other. Had I used your Rule of 5, I would have bought both of them and had multiple tens of thousands in unexpected expenses.

Rules of thumb are are only useful as far as they can steer you in generally the right direction. Using this one would have steered me towards financial disasters disguised as decent investments.

James Danchus · Answer

Well, in fairness, it wasn't really a guru and the seminar was free. On the other hand, I can't spend an hour calculating the numbers for a wholesale deal when you have a motivated seller on the phone.

Frank S. · Answer

Here is how the " rule of 5" would apply on a 45 degree roof with new plywood, architectural shingles, gutters, and tuck-pointing I have to replace.  Quote:  $13,000.

Is the "rule of 5" reliable?

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