Nov 05, 2020

Why Are Construction Costs Skyrocketing?

If the focus of your real estate investment company over the last several months has been fix and flip, you have probably noticed that your materials costs have increased due to the COVID-19 pandemic. Lumber, metal, and hardware costs have all skyrocketed to more than 50 percent in certain regions of the U.S.

Why Are Construction Costs Skyrocketing?

Interest Rates Are Low

In early October, mortgage rates plummeted as low as 3.01%. This is a historic low across the board. The sudden drop in interests has caused a massive increase in the real estate market, with more homeowners taking advantage of the new rates. Although the pandemic has threatened the economy at large, it has not deterred consumers from buying a new home or upgrading from their current home.

The Demand for Housing Never Stopped

With a surge in the market, the demand for housing and housing supplies never stopped. If anything, the demand has increased to the point where manufacturers cannot keep up with the demand. As a result, there are shortages in key construction supplies such as lumber, metal, windows, and roofing materials.

Employees Are Not Returning to Work

The sudden demand for housing supplies would normally create jobs and provide stability in the workplace. However, the CARE Act of 2020 presented many blue-collar workers with benefits, in addition to the benefits they were already receiving from state unemployment. Many workers are making as much or more than they were in their current jobs. As a result, they are staying home instead of returning to work.

How Does the Increase in Costs Affect Your Real Estate Business?

If you are involved in a fix-and-flip real estate investment business, you will need to rethink your buying and selling strategy, as well as account for an increase in costs in your budget.

Adjust Your Operating Budget

You can start by creating an allowance in your budget based on the percentage of increase in construction and supplies costs. Some materials costs have increased by as much as 50%. Therefore, you need to gauge the costs in your market and add those costs to your budget. This can keep your margins healthy when making real estate deals or completing projects.

Work with Your Contractors

If you are already in the middle of a deal, you bought the property, and you analyzed the house based on what it was before the pandemic, you may feel that you are stuck in the project. One of the things you may be able to do is meet with your contractor to discuss reducing building costs. Contractors have different models of operation that may allow them to find places where they can cut expenses. This creates a win-win for both you and the contractor. You can save money, and the contractor can keep working.

Focus on Solving Problems

Part of being successful in the real estate investment business is finding solutions for some of the most challenging problems that come your way. Learning how to navigate problems and find solutions makes you a better real estate investor. You may have to get creative and practice some flexibility. However, if the deal goes bad or you do not make as much as you had planned, remember, there are always other houses.

Instead of stressing out over the problem, do what you can to resolve it and keep moving forward. Regardless of how successful you become in real estate, some deals will never work out regardless of the reason. This is part of doing business. The bigger the problem you solve, the more powerful you become as an entrepreneur, business owner, and real estate investor.

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