Without a doubt, the most daunting part about real estate investing — whether you’re flipping, holding, or wholesaling — is estimating rehab costs accurately.
Most other to-dos within the real estate investing business model come down to taking some clear-cut steps — send direct mail, follow up, answer the phone, make an offer, negotiate, etc…
But estimating rehab costs?
Watching experienced investors do it feels a little bit like magic.
Fortunately, it’s not.
They just know some stuff that you don’t know (yet)… and their knowledge has been solidified by years of experience.
In this guide, we’re going to give you the knowledge that expert real estate investors have about estimating rehab costs (plus real-world examples) — from there, it’s simply a matter of using that knowledge so that you retain (and add to) what you’ve learned.
How to Guesstimate Rehab Costs
There’s an important difference between guesstimating rehab costs and estimating rehab costs.
Most experienced real estate investors will guesstimate rehab costs in their head when they’re first walking a property — while also taking detailed notes, pictures, and videos.
This gives them a ballpark number to work with so that they know whether this is a deal that’s worth pursuing or not.
Then once they get back to the office, they’ll dive into details and estimate rehab costs — they’ll make a list of all the necessary repairs, categorize them, and determine the total cost.
Guesstimating and estimating rehab costs are both important skills for real estate investors.
Here’s a video from Flipping Mastery TV that’ll show you how to guesstimate repair costs in under 60 seconds…
And here’s another video of the same guy walking a property and estimating repair costs live…
The 2%, 50%, & 70% Real Estate Investing Rules
Real estate investing has been around ever since the birth of capitalism — so… hundreds of years.
Over that time, investors have made a lot of mistakes and learned a lot of lessons about estimating rehab costs — based on those experiences, they’ve collectively created some rules of thumbs to help with the guesstimating process.
These rules are not 100% accurate and it’s important to take your specific market and property into consideration… but they can help provide a ballpark starting place.
Here are a few rule-of-thumbs to keep in mind…
The 1% – 2% Rule — This rule states that a property that’ll product positive cashflow (as a rental) should have a monthly rental cost that’s around 1% – 2% of the property’s value. For instance, if a home is worth $200,000, then the monthly rent should be between $2,000 and $4,000.
The 50% Rule — This rule states that, on average over time, 50% of the income on a rental property will be spent on operating expenses (not including the loan). According to this rule, if a house is renting for $2,000, it’s safe to assume that, on average over time, you’ll spend about $1,000 per month on operating expenses (taxes, insurance, repairs, utilities, etc).
The 70% Rule — This rule is the most relevant to estimating rehab costs. It states that house flippers should pay no more than 70% of a property’s after-repair value minus the cost of repairs. So if a house has an ARV of $200,000 and repairs will cost $50,000, this rule says that you should pay a maximum of $90,000 — ($200,000 x .7) – $50,000 = $90,000.
Again, these rules are not fool-proof. They’re just meant to help you guesstimate rehab costs. Check out the video below to learn more about these rules, when they work, and when they don’t.
Now that we’ve learned a bit about guesstimating repair costs, let’s look at the 4 necessary steps to creating a more detailed estimate of what’ll it cost to repair a property.
Step 1. Set After-Repair Expectations
One common mistake that new real estate investors make is spending too much to repair a property — they want everything to be perfect and they want to make sure that the property sells for top dollar.
That’s understandable (and it’s partly the fault of all the HGTV nonsense).
But it’s also a mistake.
Before you repair a property or estimate rehab costs, you need to understand the market, buyer expectations, and what it’ll actually take to sell the property for its after-repair value.
You don’t need to install quartz countertops and wood floors and solar panels…
You just need to get the property up to snuff for the neighborhood that it’s in — so keep that in mind when you’re estimating rehab costs and make sure you focus on repairs… not renovations.
Step 2. Walk The Property (Slowly)
You can’t estimate repair costs without walking the property!
(Well… technically you can if you’re virtual wholesaling… but that’s not what we’re talking about here)
Our first piece of advice for your walkthrough is to take your time. Don’t be in a rush. Examine as much as possible about the property, and take lots of pictures, notes, and videos to reference later.
But if you’re new to estimating rehab costs… then you’re probably thinking, Okay… but what I’m even looking for??
- Cabinets/drawers all open and close smoothly
- Cabinets/drawers show no signs of mold or decay
- Oven is working and in good condition (door opens slowly, springs still work)
- Stove has functioning burners
- The sink faucet has good water pressure
- Garbage disposal runs
- Range hood fan and light work and underneath the hood is clean
- Dishwasher and microwave both work properly (springs still work)
- Countertops aren’t chipped/cracked/scratched
- All windows open and close properly
- No leaks from any faucets
- Clean, stable, and functioning toilet
- No poor draining from toilet/sink/tub
- Fan ventilation works
- Tub/shower is in good condition (no chips or cracks/caulking in good condition)
- No broken tiles
- Closet doors open and close easily (if the closets have doors)
- Windows open and close easily
- Flooring and carpeting is in good condition (no cracked tiles/stained carpets/scratched hardwood)
- No major cracks in the walls, especially large horizontal cracks (this could mean bigger foundation problems)
- No signs of insect, mold, or mildew damage
- Proper insulation/ventilation
- Clean vents
- No molding/rotting shingles
- Chimney is in good condition (no cracks)
- Lawn is in good shape (green grass, maintained landscaping)
- Sturdy fence
- Sprinkler system is working properly
- Outdoor lights all turn on and outdoor outlets all work
- Garage door opens and closes easily
Okay — now you know what to look for.
But how do you look for it?
Here’s a video of a real estate investor doing a live property walkthrough…
And here’s one more…
Step 3. Estimate Repair Costs
After you’ve walked the property and taken a lot of pictures, videos, and notes, then it’s time to return to the office and make some more detailed calculations.
Start granular. Determine the repair costs for each sliver of damage you found — siding, windows, floors, etc. Just put a number next to the item.
Then you can categorize those costs into…
…and other relevant categories.
Once you’ve done that, you can add up all of those numbers and determine your total expected repair costs.
But of course, we’re leaving out a critical piece of information… how do you know how much each specific repair will cost?
Well, here are some ballpark numbers for common repairs to get you off on the right foot…
- Foundation Repair: $2,000 – $7,000
- Electrical Issues: $200 – $400 for minor repairs, $2,000 – $6,000 for full rewiring.
- Roof Repair: $300 – $2,000 for partial repairs, $5,000 – $11,000 for full replacement.
- Water Heater: $500 to repair, $1,300 to replace.
- Water Damage: $3,000
- Water Pipes: $300 for leak repair, $2,500 for sewer line repair.
- Septic System: $1,700 to repair, $3,000 – $10,000 to replace.
- HVAC: $600 for AC repair
- Mold Removal: $2,200
- Termite Damage: $600 for treatment
- Windows: $400 per window
Those numbers aren’t 100% but they’re a decent starting place.
For more specific estimates, you can use various home contracting websites such as…
Or better yet, walk the property with an experienced real estate investor. There’s no better way to learn about estimating rehab costs than by working face-to-face with someone who’s been doing it for years.
If nothing else, you can hire a contractor or professional home inspector to help you gauge repair costs.
Step 4. Consider Additional Costs
Repair costs aren’t the only expense you have to worry about as a real estate investor.
Depending on what you plan to do with the property, you should also consider holding costs, marketing expenses, agent commissions, city permits, property taxes, costs for demolition and haul-away services, appraisal and home inspection fees, pest or insect treatment charges, and anything else that you expect to spend money on.
You’re running a business.
And the only way to make money in business is to get the numbers right.
So estimate repair costs in your favor and don’t forget to include all other costs as well.
Final Thoughts on Estimating Rehab Costs
Just like every truck driver should know how to navigate tricky turns, every real estate investor should know how to estimate rehab costs accurately.
It’s an important skill for the job.
And now you have a starting place. You’ve learned how to guesstimate and estimate rehab costs — now it’s just a matter of putting that knowledge to work.