When you start to get into a rehab property you are really getting into a mathematical situation. This can be scary if you are not mathematically inclined, but if you understand that with a rehab it’s all about the numbers, you will be able to calm down a bit and know what you have to do and figure out. A rehab itself is built up from numbers that make it up, and there are certain ones that you need to be aware of to keep your rehab costs down.
The first number is your purchase price. Whether you are footing the bill yourself through cash or a loan, or financing the deal through a lender, the purchase price is going to be a big chunk of money that you need to consider. It has to be low enough to allow you to fix it up and sell it and make a profit. Too high of a purchase price and your profit will be less.
Financing is another number you need to consider. Are you putting up all the money yourself, part of the money, or seeking a loan or a lender to foot the whole bill? And if seeking a lender, what is the interest that you will have to pay back or what amount of “profit” is the lender looking at getting when you sell the property? You need to look at the financing that is going to cost you the least amount but still enable you to make a profit. The higher the interest rate or the more “spread” a lender wants, the more you will have to pay them back.
The Rehab budget is a number that can grow exponentially if you don’t keep tabs on it. Rehabs do have a propensity to suddenly surprise you with a new repair or renovation that you initially didn’t realize in making your budget. Sometimes it’s best to overestimate the rehab budget to account for surprises, but be aware that a higher budget estimate may send some investors running.
You Rehab period will also affect your bottom line. The longer it takes you to do the rehab, the longer the property sits unsold or unrented, and the more you will have to pay in holding costs. Remember that every penny you are over on your total budget is another penny off of your profit.
Holding costs include the mortgage you have to pay each month, the utilities, the renovations and the repairs. Every month you go over your deadline for repairs or to rent or sell is another month of money gone from your profit.
Closing costs such as lawyers’ fees and title services must also fit into your budget. Forgetting to include these, or underestimating their amounts, will drastically affect the final amount in your pocket.