How To Rehab Houses For Minimal Cost And...

Hey Moguls, Lex Levinrad here to continue my series about doing rehabs at a minimal cost, leaving more profit for you. Catch up by starting with Part 1 here.

In the previous lesson, Part 3, we talked about the smart way to rehab a property that’s going to become a rental. We discussed why you shouldn’t over-improve and the right choices to make when selecting materials for a rental.

So today, I’m ready to jump back into our series to talk about subcontractors and materials…

Enter the Subcontractor

When you’re looking for subcontractors, you could get a tile guy, a dry wall guy, a guy that does painting, a handyman to fix things like locks and windows and little things that go wrong in a property, etc. – but the fewer subcontractors you have, the better. If you’re lucky enough to find one guy who knows how to do everything, then it’s much easier dealing with one guy than dealing with 10 different people.

But, you will definitely need a plumber, electrician, and roofer — and those guys are always going to require permits. So typically for those, I go directly to licensed contractors and pay full price. Look, if you’re going to be changing a lot of plumbing or redoing electrical in a house or putting on a new roof, you have to pull a permit for those jobs and you have to hire someone with a license.

So, if you’re just putting tile in, you don’t need a permit. Well, the city might say that you do, but there are many homeowners who simply replace tile or put new carpets in their properties on the weekend, for example, and don’t run down to the city to pull a permit. In one city that I work in, the city requires a permit to change a ceiling fan! I highly doubt that homeowners are all pulling permits to change their ceiling fans in that city.

So, major work requires a permit and minor work often does not. Remember, though, that each city has different rules.

Over the years, if you get yourself a bunch of subcontractors who specialize in the work you need done – tile work, kitchen updates, carpets, etc. – then you should be able to quickly assemble a crew to help you fix houses. When you have a crew, any time you need a job done, you’ll have people to call – trust me, you want that.

Understand Material Costs and Labor Costs - Separately

Remember that an important variable in our ARV Formula is the repair estimate? And this formula shows us that we should first figure out what the house would be worth on the resale market after it’s been fixed up and ready to list...

After Repair Value (ARV) x 65% - Repair Estimate (RE) = Maximum Offer Price (MOP)

hey girl Well, the most important thing to take care of when you figure out what the repair estimate is going to be - is to make sure you separate the cost of the labor and the cost of the materials. If you don’t do this, then you’re not going to know how much you’re paying, and you are not going to know how much the subcontractor is making. So, keep the cost of the labor and the cost of the materials separate.

As far as materials are concerned, go to a place like Home Depot and familiarize yourself with the prices. I recommend that you take a notepad and go aisle by aisle writing down the prices of common items like kitchen sinks, faucets, cabinets, tile, paint, drywall or any other components that you would need. (You can also do this online when you research prices, but I’ve found it’s better if you do it in the store.)

Here’s a great tip: You can pay Home Depot directly for the materials and even have them deliver the materials to your jobsite. But you need to be careful... I have seen many people have their materials stolen. (Sad but true.)

So, your best bet is to go with your subcontractor to Home Depot or Lowe’s, pick out the items and pay for them. Then, you can have the subcontractor leave with the items after you’ve paid for them. Over time, you might be able to skip the trip to Home Depot and have your subcontractor go there by himself, and you can just pay Home Depot over the phone with a credit card.

There are downsides to this, though...

Your subcontractor may save the receipt, and then return items for a store credit. So, always get the receipts - and check what they purchased and how much. Otherwise, they will buy more paint and other common items than they need and use it on another job. (Again, sad but true.)

By paying for the materials yourself, they cannot mark up the price of your materials. They can’t tell you it costs X if it costs Y because you’re paying. And by doing it this way, you can easily separate the materials and labor - once you know what the cost of materials are, you can negotiate for the cost of the labor.

Subcontractors are going to hate doing this. Because the way they make their money is by quoting you on the total job. So if they quoted you $1,000 to paint the interior of a small house, they know that they can do it for just $250 and the $750 is their profit. Of course, they don’t want you going after their profit. And by separating labor and materials, that’s partly what’s happening and why they don’t like it.

Minimal Rehab Cost = Maximum Profit

See, you have to learn how to do these jobs for the cheapest amount possible if you’re going to be successful in the rehab business. If you’re rehabbing a property to rent it out, then you want to make it rentable by spending as little as possible. (As we’ve already talked about, tenants don’t typically care to keep the condition of the home as nice as when you fixed it up. It’s not their own property after all.)

But, if you are rehabbing a house to fix and flip and list on the MLS, then you still want to spend as little as possible – but you have to make it as nice as possible. Buyers of fix and flips expect better finishes. This means you will have to pay more for certain items like upgraded countertops, cabinets, tile, faucets, etc. And the quality of the work will need to be more superior to the way you would fix, say, a Section 8 rental property.

You need to know how much the repairs are going to cost you before you purchase the property. And, even if you’re not going to be a rehabber - you’re just going to be wholesaling properties - you still need to know how much labor and materials cost. See, when you’re writing your property’s description, you will need to have the right numbers when calculating your repair estimate. Investors want to know that, of course. And because we are separating labor and materials - you need to know the cost of both. Again, it’s super important to understand both the labor and material costs and to separate them. Why? That’s the only way you can tell how much profit is built in to the job.

So, if you’re a wholesaler and a buyer asks you how much in repairs the house needs – let’s say you answer that the house needs $15,000 in repairs. But then you need to be ready for the follow-up question which will be: “What does it need?” And you need to be able to say, “Well, it needs $1,000 in paint; $2,000 in tile; $3,000 for the kitchen; and $3,000 for the bathrooms.

You have to be familiar with what materials cost and how much it would cost in labor to install those materials. And if you’re looking to do a fix and flip and you don’t know labor and material costs – well, then you won’t have a clue as to how much profit they are making on you. That is not a good thing. So learn to understand material and labor costs.

Take a trip to Home Depot or Lowe’s and walk down the aisles with a notepad and a pen and familiarize yourself with prices. Breaking up the cost of materials is pretty simple… you just need to know what’s needed for the job and either check the prices or simply buy the materials yourself.

Coming Up…

Okay, investors, I think I’ve said it enough in this lesson – but how’s about once more for good measure? It’s super important to separate labor and material costs. And now that we know the best ways to handle things on the material side…

In my next installment, we’ll talk specifics about labor costs and the timeframe of the jobs. See ya then.