How To Rehab Houses For Minimal Cost And...

shaggy carpet Hey Moguls, Lex Levinrad here with the final installment in my series about rehabbing houses for minimal cost. If you need to catch up, make sure you start from the beginning of this helpful series with Part 1.

Last time, we talked specifics regarding labor costs, the timeframe of rehab jobs and the right way to figure out a typical labor rate.

Today, I want to continue that discussion about rate negotiation using our example from the previous lesson. We said that a 5-day bathroom job would be $600 total cost (labor and materials).

Now, I want to wrap up this series by explaining some shortcuts you could take regarding rate estimates and quotes, and wrap it all up with some brief recaps and final thoughts about labor.

There’s always options

There are in fact ways that you can take shortcuts when you’re working on getting your numbers in order for a rehab job.

For example, you can call a professional paint company and ask them how long it would take to paint a 1,100-square foot house. And then you can use that information to figure out if it’s really going to take 5 days or if you could do it in 2 days. You could also ask them:

How much the paint would cost
How much the labor would cost
If you could buy the paint or if they have to buy the paint
What kind of paint they use

You could also accomplish the same thing by asking employees at the paint counter at Home Depot or Lowe’s. Or you could even Google it. Look, it’s not rocket science. One gallon of paint covers 400 square feet, which is about the size of a small bathroom. Once you learn paint, you can learn tile, carpet and all the other components, too. If your handyman knows that you know prices, then it is much more difficult for them to overcharge you – especially if you ask for materials and labor to be broken down.

So, you can pretty much figure out how much something costs just by asking questions, and you’re not limited to one person. You can call the next painter and the next painter... you could call 15 painters in one day asking for a quote from each. The more people you talk to, the more information you’re going to pick up.

One guy will say: “Oh, you need X number of rolls of plastic and it’s going to cost $150.”

Another painter will say: “It’s not going to cost that much. It’ll be like $40. I buy the ones that cost $20 per roll and you need 2 rolls and $40 is what it will cost.”

Remember that each component has a price, which can and should be checked. You can even easily look it up online on sites like Lowe’s or Home Depot.

kids Now that you have that information, put it all together and keep it for future reference. Over time, the more rehabs you do, the more this will become second nature. And just like our paint example, you can follow the same steps for calculating anything - tile, drywall, countertops, etc. Simply call a drywall company and ask them how long it will take them and how much it would cost to drywall a room or a whole house.

When you do this enough times and call enough places, eventually, you’ll know what things cost. You’ll know it’s going to cost X amount in materials and X amount in labor to do the job.

Let’s recap and review

So, basically we’ve covered how to use the information backwards… we asked how much they want for labor and then how long the job will take. Then, we add those 2 numbers together to get a total labor cost. Next, you add to that the cost of the materials, which brings you to a total price. Now take that total price and shop it around.

We’ve been through one example, but I’d like to run through another one with different numbers, so you have an even better idea of what you might encounter.

Call a painter and ask: “How much will it be to paint this house?” His answer is $1,000. I say: “Okay, how long is it going to take you?” His answer is 2 days. Now I ask: “And how much will the paint and materials cost?”

Now he’s going to get a little stuck because he knows that it’s not even $400 for paint and materials. So when you ask him the labor question and you ask him if he charges $300 per day in labor, he is going to realize he is stuck. Suddenly, his price magically goes down to $200 per day in labor.

See, in their minds, they know what items cost since they do this for a living. They also know how much they would like to make. And they base their quote off of that. They essentially calculate their cost of materials, their cost of labor and their profit margin before quoting you. A licensed general contractor will take it further and multiply his cost by as much as 1 to 2 times to give you an initial estimate. That is the profit they would like to make. And if they can get that from other customers, well, then you need to find someone else to do the job. More often than not it will be a handyman.

In other words, the way that they make their money is by taking the labor and the materials and adding it all together. They know how much they want to make in a day, and they know that they’ll work for $150 a day. They’d love to make $250 or $300 a day, and if you ask them for a quote, that’s where they’re going to start their quote at.

This is one of the reasons why I can’t encourage you enough to always separate your labor costs from your material costs.

Be a ninja negotiator

If you’re going to be involved in rehabs, you have to be able to negotiate. The only way you can negotiate is if you know what the cost of materials are and you know what the cost of labor is.

construction Think about it… if you’re going to pay a guy $225 a day to paint your house, you really have to ask yourself this: Will the guy who will take $125 or even $100 a day really do that much of a worse job than someone who charges more?

Many times, the answer is no. Sometimes it’s definitely worse. It just depends on the experience of the person you hire. Some of these guys are working at professional painting companies as subcontractors. Every day they go and paint houses and they’re pros. They’re expert painters, but they’re laborers who work for someone else. They could be working for you. They’re not self-employed and they might need you to provide them with all the materials, and if you do, they can do the job for a lot less. They also might need to work your job on weekends or other times when they don’t have work – so be flexible.

Pay for your materials directly

You have to explore all your options and go with whatever is cheaper. But don’t be cheap. There is a difference. The more estimates you get and the longer you’re in this business, the better you will get at creating repair estimates.

If you know how to estimate how much paint is needed for a room or if you know how much that paint costs, then you know what your material cost is. The same is going to apply to tile, drywall and everything else. It’s always going to be better for you to pay for your materials directly from a company like Home Depot instead of giving a big check to the subcontractor.

If a subcontractor tells you the job is going to cost $1,000 and he asks for $500 upfront, unless you know him really well, there is no guarantee that you’re going to see him again. Granted, not everyone’s dishonest, but some people unfortunately are. And if you hand a guy whom you don’t know some money, he might just think that he could run off with your money – and many do exactly that.

So be careful who you choose to work with on rehab projects. And try to hire people who were referred to you by someone else – a trusted source.

If you pay for the materials directly, you really have 2 benefits.

You know what materials cost since you get the receipt. So workers can’t just suddenly increase your material cost without you knowing.
No one can run away with your money because you bought your materials and you have your them, so hold on to them.

My experience is that people will run off with money a lot quicker than they will with materials. A handyman cashing a check and then not doing a job is not the same thing as him loading up his truck with your tile and disappearing, which is outright theft where you can call the police and hopefully have them thrown in jail.

See, the first guy you have a problem with because he didn’t perform on a job. The second, however, is burglary. Most people would not resort to that as quickly as they would to cashing a check that you wrote.

So, if a subcontractor runs off with your money, you have only yourself to blame because you should always pay for your materials and negotiate the labor separately. That way, you’re in control of your materials and no one can run off with your money.

If you build up a relationship over time and feel very comfortable with someone, then great! You can write that check to them… just make sure that you have the ability to issue them a 1099 tax form, which means they have to give you a signed W9 before you give them a check. This way, you have their social security number and you can deduct the expense for taxes. Remember, you don’t have that problem if you write the check directly to Home Depot. So there are certainly a lot of advantages to paying for the materials yourself.

And, you don’t even need to be there to pay for the materials. You can fax or scan a credit card authorization form. I do this every day. The contractors get all their materials and head to the Home Depot Pro Desk to get checked out. The Pro Desk cashier calls me, and I give them my Home Depot credit card information, and the subcontractor is on his way. Home Depot emails me the receipt and I know exactly what was bought. They can’t return anything without me knowing about it, and they can’t buy anything extra without me knowing about it, because I have the receipt and I pay for the materials.

A final word on labor

Now, the only thing that’s left is the labor, which quite frankly, is not that negotiable. Because so many people are laborers, there’s a typical going rate for labor in every area of the country. If the going rate is $125 a day or $150 a day, then there’s not too much negotiation there. But what you can do is make sure that they’re on the job by going by and checking in.

I’m saying it again - the key to getting a job done at a good price is understanding material cost and understanding labor cost… and separating the two.

So, if you find a good handyman or a really good sub-contractor – especially someone who knows a lot of the different rehab tasks – then you should hold on to that person and take care of them. I have a guy who does tile, carpet, drywall, kitchens and bathrooms… just about everything with the exception of electrical. I take care of him and I let him live rent-free in one of my rental units. Now, he’s locked in... when I need something done, he’s there. And he does it for a good price. So if you find a good handyman, make sure you hold on to them and treat them well.

workers Remember, try to get the best price for a labor guy like that, but don’t take advantage of him or go all cheapskate. You don’t want them to be unhappy. You want them to stay working with you. And you have a real advantage when you’ve got one guy who knows how to do most of the work, especially if he’s responsible enough to supervise other people. Then you can have them working on a job doing one task while another couple workers are doing other tasks and the first guy can keep an eye on them. And that frees up your time to find more deals.

After a while rehabbing houses, you’ll eventually develop a “crew” in the business. You’ll have tile people, drywall, painters, carpenters, plumbers, electricians – all these sorts of people at your disposal. When you have a crew, all you need to do is pick up your phone and you’ve got a guy ready to do the work.

In my case, most of my jobs are quoted via text with an email follow-up. I know how much my guys want to make. I know what materials are needed and how much they cost. And I know how long it takes to get that particular job done. More importantly, my crew knows that I know. So they cannot take advantage. And they respect that.

I have rehabbed houses in towns that I have never been to. I have rehabbed and sold houses without ever stepping foot in the house. Simply by using a proven crew that I have experience working with, I am able to repair houses anywhere. I have the people do the work, and then I have my property manager take pictures and put a lockbox and signs out on the property. Without entering the house, I can have a house rehabbed from beginning to end.

And you’ll be able to do that too once you’ve built a crew of people.

That’s a series wrap

As a final note, remember that the most important thing is that the more rehabs you do, the easier it becomes. It is a learning process. You learn as you go.

Try and find yourself a mentor – someone who is fixing and flipping houses in your town. Someone like me who has done rehabs and knows what they’re doing. It will really go a long way to helping you when you’re doing your first rehab.

Don’t be afraid of doing rehabs. Some investors just wholesale and flip contracts because they’re just too petrified to get involved with a rehab. Don’t do that, it’s not that difficult.

If you have a mentor, it can really help you by letting you overcome the anxiety of doing your first rehab, and that’s what happened with me. My first rehab — I had a mentor who literally walked me through the whole process.

Well investors, we’ve finally made it to the end of my 6-part series. I know I covered loads of helpful, actionable info, so reread it and familiarize yourself with all the tips and knowledge I’ve shared.

Here’s to your rehab project for minimum cost and maximum profit!