Hope for the best, expect the worst
When I buy investment property, every new project I do reminds me that it is absolutely impossible to escape overages. I’m in the middle of a project right now, and I’m still running into overages that I did not anticipate. And I’m pretty good at anticipating things that can go wrong on a project. I’ve had a little bit of experience…
Nevertheless, I still screw up. And so does everyone professionally involved as a real estate investor when they buy investment property that requires fixing up or wholesale renovation. Be it flipping a property, or simply overhauling units in a rental property, running over on your cost estimates is just a part of the game. And the reason is simple – you can’t predict everything that is going to go wrong, nor can you control every facet of the renovation. Even if you know most of your local building code, you probably don’t know it all backwards and forwards. And a building inspector will certainly remind you exactly what things you’re missing on your renovation.
Like the Boy Scouts say, “be prepared”
So when you incur overages, you have to be prepared for them. And always expect the unexpected. For example, you cannot prepare for exactly when a required inspection will take place. Your electrician may have agreed to do all their work and get their inspection done, but then the electrical inspector for your area may not be available for another few days – or a week. And you were waiting to close your walls up in order to finish your project. But without that electrical inspection, you (and your sub-contractors) have to wait, and it puts everyone on hold. And when they’re put on hold your project suffers.
A lot of times subcontractors that are put on hold have to leave for other jobs. The name of the game with tradespeople is juggling as many jobs as possible without pissing off all their clients. And as a professional real estate investor, you have to understand this concept. It helps if you work regularly with sub-contractors, since they know where their bread is buttered. You may be less likely to lose them for long stretches when delays are invariably created.
Inspections, inspections…and more inspections
Let’s say your local building inspector is also the plumbing inspector for your area. Well, you’re going to have to also wait for him to make room on his busy schedule to meet with your plumber to approve their work. If they’re running several days behind, then that’s your tough luck. If your carpenter has to wait for that plumbing inspection before he can close up open floorboards or walls, or do final sheetrocking, that’s just a variable you can’t predict. In addition, let’s say your painters are waiting for everything to be done so they can come in and do their work. When the building inspector takes his time getting around to your inspection, you could lose a few days waiting, and your painter may take another job in the interim. So your project may be additionally delayed by several days before your painters come back to you.
These are all examples of variables you cannot possibly predict before you buy investment property and start a project. And for this reason, you have to allow for overages in your budgeting. In addition and as part and parcel of allowing for overages, you have to allow extra time for things to go wrong.
The bad weather blues
An example of allowing for extra time is when your mason is doing some foundation work, and you get a stretch of rainy weather for several days in a row. And all your exterior work depends on getting the house closed up in the foundation area, so that you could do your finishing and landscaping work. But bad weather can hold you up. It’s just another variable you have no control over on your project.
So with the litany of things that can go off schedule on a project, all you can do is plan ahead of time for variables that are out of your control to go wrong. And believe me, they’re going to go wrong. So be sure to build in your extra overages amount into your budget (10% at a minimum, and up to 20% of your overall budget to be safer). And also allow extra time (from several days to a month more) depending on how large the scale of your project.
But overall, consider that your sanity is the most important thing you need to save. As a professional real estate investor, good planning beats all. And proper planning for both cost overruns, as well as time overages, will help keep you sane in the process.
photos courtesy of clearlyderby.blogspot.com, mathforgrownups.com, nevadacounty.com, washingtonblade.com, blogs.reuters.com, infrawindow.com