How to Plan Your Renovation Budget
For many potential real estate investors, the prospect of starting your first fix and flip project can be exhilarating and overwhelming without a well-thought-out budget. Planning a comprehensive renovation budget is a crucial aspect to ensure profitability for new and seasoned investors alike and can help prove your readiness to your lender.
To help new investors, and experienced investors looking to brush up on today’s financial landscape, the team at Asset Based Lending has compiled a few of the key portions of estimating costs for labor and materials.
Assess the Property
The first step to evaluating your fix and flip budget is to gather as much information as possible on the condition of the property. Taking the necessary time to walk through a property whenever possible gives investors an initial snapshot of the repairs that are vital to the project. Though this may only answer questions regarding cosmetic enhancements, a keen eye can pick up on some of the essential structural fixes. For many investors having their general contractor walk through properties with them can shed more light on potential repairs like foundation issues, roof repairs, electrical and plumbing updates.
Create Your Scope of Work – and Track in Real Time
As you walk through a property and continue to dig into the condition through inspections and property history, creating a list to outline every aspect of the project acts as a roadmap for labor and material requirements. Breaking down your project into groups can help investors tackle each project with more clarity and will arm you with more information when you are looking for financing. Luckily, with so many resources available to investors online, such as BiggerPockets, it can be pretty easy to find templates to track and plan your scope of work. Continually reviewing, updating, and tracking progress and costs through your scope of work is a key part to maintaining your budget.
Estimate Labor Costs
Researching local labor rates for the various tasks required for your renovation is an essential piece of determining the most current costs for your project. It is no secret that labor costs have reached new heights in the post-pandemic world and understanding the range of prices that projects can cost in today’s climate will determine your needs list versus your wants list. When investors are up against large ticket repairs like bringing electrical systems up to code or repairing damaged plumbing, understanding those costs and the desired level of finishes will dictate the total renovation budget. Interviewing contractors and gathering quotes can be a great way to better familiarize yourself with not only costs but timelines for your project. Connecting with local experts can help you gather this kind of invaluable information.
Estimate Material Costs
Taking the time to collect quotes from professionals will not only inform labor costs but should shed light on material costs as well. Having conversations with your subcontractors about the required materials will direct your knowledge on costs for flooring, cabinetry, fixtures, and any other materials relevant to the project. You can then decide to take the next steps to source suppliers and obtain the materials in bulk, especially if you plan to invest in more properties in the future. Buying in bulk can keep costs down and avoid potential market price fluctuations. However, something to keep in mind when pricing out materials is that some contractors can purchase materials using discounts, and will sometimes pass those savings onto their clients, so remember to discuss these costs with your contractor before purchasing pallets of flooring.
Keep a Contingency Fund
Tackling an entire fix and flip requires a lot of money, and keeping an emergency fund can help mitigate unforeseen expenses. Some investors plan to keep around 10% of their total budget cost on hand to cover any unexpected costs for issues that arise during renovation, or last-minute changes to the project scope. Even the most experienced investors know that each new project comes with surprises, and preparing for those challenges ahead of time can keep investors from getting in over their heads.
Keeping an up-to-date budget and timeline makes any investor better equipped to tackle fix and flip real estate investments and maximize your chances of being successful and profitable. And of course, working with a lending partner who understands all aspects of the market, from home prices to labor costs, helps keep your budget on track.