Breaking into the rental market with Inheritance property

Member since 2024 · 14 posts · 3 votes

I have been reading about the costs to build a duplex and begin renting, but thought my situation was a bit unique and so I decided to make my own post.

A few years ago we inherited a house and land in town close to a local graduate school for physical therapy, occupational therapy, physicians assistant, etc.

Being in the field of physical therapy myself, I know that these students come from all over the U.S. and have difficulties finding places to rent in this very low-income and rural town. These students typically are backed financially by their parents willing to pay these "cheap" rent prices to put their kid through graduate school. The graduate school is less than 10 years old and still adding programs, and while dozens of people have begun converting old of homes/office spaces to rental units to capitalize on this obvious opportunity, it remains an investors paradise.

The situation:

The house is a ~1400 sq ft brick ranch style home on a good plot of land that we recently had surveyed and parceled into two individual lots. The first plat has the house (recently appraised at 154k) which requires more work than we'd like to put into it. The second plat used to contain a mobile home years ago and has town water/sewer/electric hookups not currently being used. Our goal is to sell the first plat with the house and use the money to build a modest modular duplex on the other plat to rent.

We are both very inexperienced when it comes to building and renting, and need all of the information we can get- what are some unforeseen costs associated with building a modular? What are some questions we should be asking prospective builders? What are some costs associated with hooking up utilities and electrical to our modular and what should we be searching to get an idea of cost?

A general breakdown of the costs you would look into as an experienced builder/investor would be very appreciated. Not looking for specific money amounts obviously, I can figure that out on my own as long as I have some direction. Just want a general itemized list of potential costs to look into, such as cost to develop land, build foundation, permits, delivery and building of modular, hooking up utilities, etc.

Thanks in advance!

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Kevin Sobilo

Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes

Quote from @Anthony Pollachioli:

@Kevin Sobilo:

Tax implications are never based on local laws because we are talking about FEDERAL taxes. If local laws changed federal taxes localities would prevent residents from having to pay at all! A gift would of course be WORSE because then you would be on the hook for capital gains on the ENTIRE SALE PRICE.

What I suspect is that you "inherited it" but that when you transferred title into your name the deed showed $1 because that is allowed for close family transfers and avoids state transfer tax aka tax stamps on the sale. At least that's how it would be in my state. So, I suspect my original response may still be on point with regard to federal taxes.

I think your mindset about renters may need some re-evaluation. Renters, ESPECIALLY those who know they are only looking to rent for a finite period are generally focused on function over aesthetics. You aren't selling someone their forever home. You are renting them a place for a couple years max. So, updating a 1940s ranch is a perfectly reasonable sounding thing to do. In fact a 1940s ranch isn't even "old" in many parts of the country. For a rental in my market that would be NEWER than average as most rentals were built 1890-1920.

There are so many other options to consider. Could the house be converted to a 2 bedroom and studio? Could it be rented by the room rather than to a single tenant? Does it have a basement or garage that could be converted into livable space.

A remodel sounds to be like lower hanging fruit. Less investment, less time, less risk. So, I would try to look at that with fresh eyes and evaluate every possibility imaginable before dismissing it.

There is a tendency with people, especially new investors to want to create "what they like". What you like may or may not make the best sense as a rental investment. Me personally, it took me a while to understand what the expectations were for rentals in my market for different classes of rentals and it was much different than I would have expected at the beginning. For example a C class rental in my market is on average functional but VERY dated looking like the finishes are from the 1970s or early 1980s. This is what an entry level working class family expects to find on average here. This will vary from market to market, but you want to understand your market IS, NOT what you WISH it was.

For a renter you describe including a washer/dryer is probably more appealing to them than having a brand new modern aesthetic as in many markets those are not typically included. This is just one example of how expectations may differ from how a new investor might believe.

Not sure why I put "local" but re-reading the same article I read a few weeks ago, it does change the way the IRS views the sale. i.e. it is no longer considered a "sale" but a gift. The house was not inherited, it was sold for a $1 to us several years prior to the resident (a family member) passing away. Here is the link for reference, I'm sure you could make better heads/tails of it but we still plan on talking to a financial advisor. (https://ibuyer.com/blog/can-you-sell-a-house-for-one-dollar/... Regardless, we have considered your input and are willing to attempt to evaluate the cost of rehabbing versus selling and building. Here are our concerns;

- Some of the floor joists have been exposed to excessive moisture and are rotting away. There are a few joists I can physically stick a finger into the wood is so soft. This seems like a costly fix, as well as a rental safety concern

- The basement leaks, the basement is below ground and built into a hill, and there is always stagnant water in certain spots of the basement floor regardless of amount of rain, which only makes it worse. We have since put in a dehumidifier but too little too late it seems, I believe the basement will need to be sealed.

- The unattached garage (built into same hill) has drain run off that goes underneath the driveway and into the road. Drainage pipe is broken/clogged somewhere and water drains freely under the driveway. I recently had to fill a sinkhole that formed in the driveway that was at least a foot deep with gravel and top with asphalt patch. A short remedy for a potentially much bigger issue.

This is all aside from a very outdated kitchen and flooring which I agree is purely aesthetic, but considerable costs. It is a 3 bedroom with 1 bathroom. 1 bathroom I don't believe will be attractive to potential students. Converting to a 2 bedroom and studio may be possible, but is all additional cost on top of structural concerns previously mentioned.

We do not have a lump savings to cover the cost for this rehab. We have talked about taking out a HELOC, but then we are making payments on a home for an unknown amount of time for it to become rental ready. That is what led us to believe it would be easier to sell and turn the money directly over into a new build.

All of those concerns out in the open, I'm all ears. Rehabbing was our first thought and is not out of the question. Do you still think that would be the most viable in our situation? How would you go about financing the rehab? I assume our first step would be to get a quote from a structural repair contractor?

1. Wood rot is certainly serious, but depending on the extent might only require sistering new lumber besides the compromised sections. I haven't dealt with rot like that myself but I have dealt with joists that have split or that were compromised by a plumber carving them up like a turkey.

2. With basement water, the first place I look it outside the house. There are often things that can be done externally to help with the situation. Ranches have larger roofs so more water shedding from the roof during a rain. Directing that runoff away from the house is more of a priority with a ranch for that reason. Also grading the surface to force surface water to run away from the foundation even just a few feet can make a difference.

If a larger issue with the hill exists, I would bury drain tile and catch some of that water from the hill and direct it around and away from the house.

If I could not mitigate the issue sufficiently outside the house, then I would probably add a sump pit and perhaps some kind of perimeter drain in the basement in the most problem area.

Old home basement aren't meant to be perfectly dry like a modern house, but you do want to keep them from being constantly "wet" as opposed to occasionally damp.

3. I know you think of the kitchen remodel as a "considerable cost", but often times old cabinets can be refurbished by painting them and possibly changing hardware. Flooring can be a basic vinyl or even a DIY job using peel & stick flooring.

Expensive materials is more risk for the landlord because when they get damaged there is more likelihood you will lose money on the deal because collecting damages exceeding deposits if difficult.

Like I said, look at what typical rentals look like in your area. I suspect the typical is not exactly what you're now imagining.

4. I am not a fan of HELOCs when you need the money for long periods. I would just do a cash-out refi with a 30 year loan. You can probably get 75% of the appraised value So, over $100k. That will cover not only the rehab but also the mortgage payments and carrying costs until the rehab is done plus more to invest in whatever else you choose.

Rates are a bit high at the moment but try to get something without a prepayment penalty and then refinance in a couple years when hopefully rates are lower.

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Kevin Sobilo
Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes
2y
@Anthony Pollachioli, a couple thoughts.
1. I would investigate the tax implications of your plan to sell the existing house. You inherited the property "a few years ago". So, your basis for capital gains is the value of that property a few years ago. All the value increases since then you will be taxed on. So, if it was $100k when you inherited it and you sell for $150k you owe tax on $50k. That's the general idea anyways.
2. I would get a local experienced investor to walk through that house with you. To you, it may look like too much rehab, but might really be your least costly and most beneficial way to get a good rental up and running. It also might be a lot faster to get it in rent-ready condition than a new build.
3. I have not gotten good impressions from modular builders. When I have spoken to them they talk like used car salesman. A common question they like to ask is "So, how much are you looking to spend?" which makes me think they want to make sure they charge me as much as they possibly can! I've been good, because I want to respond with "What are your costs and what is your profit margin so we can figure out the least you can charge for what I'm looking for?" because I'm sure they don't want to give that information out either. lol
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Anthony Pollachioli
OP
Member since 2024 · 14 posts · 3 votes
2y
Quote from @Kevin Sobilo:

@Anthony Pollachioli, a couple thoughts.
1. I would investigate the tax implications of your plan to sell the existing house. You inherited the property "a few years ago". So, your basis for capital gains is the value of that property a few years ago. All the value increases since then you will be taxed on. So, if it was $100k when you inherited it and you sell for $150k you owe tax on $50k. That's the general idea anyways.
2. I would get a local experienced investor to walk through that house with you. To you, it may look like too much rehab, but might really be your least costly and most beneficial way to get a good rental up and running. It also might be a lot faster to get it in rent-ready condition than a new build.
3. I have not gotten good impressions from modular builders. When I have spoken to them they talk like used car salesman. A common question they like to ask is "So, how much are you looking to spend?" which makes me think they want to make sure they charge me as much as they possibly can! I've been good, because I want to respond with "What are your costs and what is your profit margin so we can figure out the least you can charge for what I'm looking for?" because I'm sure they don't want to give that information out either. lol

Hey Kevin, thanks for the quick response. Regarding the tax situation, I used the wrong wording in my original post. The house was not technically inherited, it was bought for $1. From what I have read, this is viewed as a "gift" and so the capital gains tax implications change based on local laws/regulations. We are going to speak to a financial advisor about this.
The home is beautiful but outdated and needing a ton of work. It is technically "move in ready" but it is a 3 bedroom house versus a duplex where we can hope for 4 beds (and 2 doors) which would mean greater rental income. We are looking to appeal to young college grads and this 1940s home is unlikely to get that.
I appreciate your insight on the modular builders, whether or not builders can be "haggled with" is another concern/question I had. We have never dealt with a builder before so that is great insight, thank you!
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Kevin Sobilo
Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes
2y
Quote from @Anthony Pollachioli:

Quote from @Kevin Sobilo:

@Anthony Pollachioli, a couple thoughts.
1. I would investigate the tax implications of your plan to sell the existing house. You inherited the property "a few years ago". So, your basis for capital gains is the value of that property a few years ago. All the value increases since then you will be taxed on. So, if it was $100k when you inherited it and you sell for $150k you owe tax on $50k. That's the general idea anyways.
2. I would get a local experienced investor to walk through that house with you. To you, it may look like too much rehab, but might really be your least costly and most beneficial way to get a good rental up and running. It also might be a lot faster to get it in rent-ready condition than a new build.
3. I have not gotten good impressions from modular builders. When I have spoken to them they talk like used car salesman. A common question they like to ask is "So, how much are you looking to spend?" which makes me think they want to make sure they charge me as much as they possibly can! I've been good, because I want to respond with "What are your costs and what is your profit margin so we can figure out the least you can charge for what I'm looking for?" because I'm sure they don't want to give that information out either. lol

Hey Kevin, thanks for the quick response. Regarding the tax situation, I used the wrong wording in my original post. The house was not technically inherited, it was bought for $1. From what I have read, this is viewed as a "gift" and so the capital gains tax implications change based on local laws/regulations. We are going to speak to a financial advisor about this.
The home is beautiful but outdated and needing a ton of work. It is technically "move in ready" but it is a 3 bedroom house versus a duplex where we can hope for 4 beds (and 2 doors) which would mean greater rental income. We are looking to appeal to young college grads and this 1940s home is unlikely to get that.
I appreciate your insight on the modular builders, whether or not builders can be "haggled with" is another concern/question I had. We have never dealt with a builder before so that is great insight, thank you!

Tax implications are never based on local laws because we are talking about FEDERAL taxes. If local laws changed federal taxes localities would prevent residents from having to pay at all! A gift would of course be WORSE because then you would be on the hook for capital gains on the ENTIRE SALE PRICE.

What I suspect is that you "inherited it" but that when you transferred title into your name the deed showed $1 because that is allowed for close family transfers and avoids state transfer tax aka tax stamps on the sale. At least that's how it would be in my state. So, I suspect my original response may still be on point with regard to federal taxes.

I think your mindset about renters may need some re-evaluation. Renters, ESPECIALLY those who know they are only looking to rent for a finite period are generally focused on function over aesthetics. You aren't selling someone their forever home. You are renting them a place for a couple years max. So, updating a 1940s ranch is a perfectly reasonable sounding thing to do. In fact a 1940s ranch isn't even "old" in many parts of the country. For a rental in my market that would be NEWER than average as most rentals were built 1890-1920.

There are so many other options to consider. Could the house be converted to a 2 bedroom and studio? Could it be rented by the room rather than to a single tenant? Does it have a basement or garage that could be converted into livable space.

A remodel sounds to be like lower hanging fruit. Less investment, less time, less risk. So, I would try to look at that with fresh eyes and evaluate every possibility imaginable before dismissing it.

There is a tendency with people, especially new investors to want to create "what they like". What you like may or may not make the best sense as a rental investment. Me personally, it took me a while to understand what the expectations were for rentals in my market for different classes of rentals and it was much different than I would have expected at the beginning. For example a C class rental in my market is on average functional but VERY dated looking like the finishes are from the 1970s or early 1980s. This is what an entry level working class family expects to find on average here. This will vary from market to market, but you want to understand your market IS, NOT what you WISH it was.

For a renter you describe including a washer/dryer is probably more appealing to them than having a brand new modern aesthetic as in many markets those are not typically included. This is just one example of how expectations may differ from how a new investor might believe.

1 Reply
Kevin Sobilo
Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes
2y
@Anthony Pollachioli, BTW I have tenants moving in right now who fit your tenant profile. A young couple where the husband is coming here to get his MBA from local college.
The house they are renting is probably 100 years old and I purchased it for $10k. I'm all-in with the purchase price plus rehab for maybe $35-40k total. Renting it to them for $1100/month.

1 Reply
Anthony Pollachioli
OP
Member since 2024 · 14 posts · 3 votes
2y
@Kevin Sobilo:

Tax implications are never based on local laws because we are talking about FEDERAL taxes. If local laws changed federal taxes localities would prevent residents from having to pay at all! A gift would of course be WORSE because then you would be on the hook for capital gains on the ENTIRE SALE PRICE.

What I suspect is that you "inherited it" but that when you transferred title into your name the deed showed $1 because that is allowed for close family transfers and avoids state transfer tax aka tax stamps on the sale. At least that's how it would be in my state. So, I suspect my original response may still be on point with regard to federal taxes.

I think your mindset about renters may need some re-evaluation. Renters, ESPECIALLY those who know they are only looking to rent for a finite period are generally focused on function over aesthetics. You aren't selling someone their forever home. You are renting them a place for a couple years max. So, updating a 1940s ranch is a perfectly reasonable sounding thing to do. In fact a 1940s ranch isn't even "old" in many parts of the country. For a rental in my market that would be NEWER than average as most rentals were built 1890-1920.

There are so many other options to consider. Could the house be converted to a 2 bedroom and studio? Could it be rented by the room rather than to a single tenant? Does it have a basement or garage that could be converted into livable space.

A remodel sounds to be like lower hanging fruit. Less investment, less time, less risk. So, I would try to look at that with fresh eyes and evaluate every possibility imaginable before dismissing it.

There is a tendency with people, especially new investors to want to create "what they like". What you like may or may not make the best sense as a rental investment. Me personally, it took me a while to understand what the expectations were for rentals in my market for different classes of rentals and it was much different than I would have expected at the beginning. For example a C class rental in my market is on average functional but VERY dated looking like the finishes are from the 1970s or early 1980s. This is what an entry level working class family expects to find on average here. This will vary from market to market, but you want to understand your market IS, NOT what you WISH it was.

For a renter you describe including a washer/dryer is probably more appealing to them than having a brand new modern aesthetic as in many markets those are not typically included. This is just one example of how expectations may differ from how a new investor might believe.

Not sure why I put "local" but re-reading the same article I read a few weeks ago, it does change the way the IRS views the sale. i.e. it is no longer considered a "sale" but a gift. The house was not inherited, it was sold for a $1 to us several years prior to the resident (a family member) passing away. Here is the link for reference, I'm sure you could make better heads/tails of it but we still plan on talking to a financial advisor. (https://ibuyer.com/blog/can-you-sell-a-house-for-one-dollar/... Regardless, we have considered your input and are willing to attempt to evaluate the cost of rehabbing versus selling and building. Here are our concerns;

- Some of the floor joists have been exposed to excessive moisture and are rotting away. There are a few joists I can physically stick a finger into the wood is so soft. This seems like a costly fix, as well as a rental safety concern

- The basement leaks, the basement is below ground and built into a hill, and there is always stagnant water in certain spots of the basement floor regardless of amount of rain, which only makes it worse. We have since put in a dehumidifier but too little too late it seems, I believe the basement will need to be sealed.

- The unattached garage (built into same hill) has drain run off that goes underneath the driveway and into the road. Drainage pipe is broken/clogged somewhere and water drains freely under the driveway. I recently had to fill a sinkhole that formed in the driveway that was at least a foot deep with gravel and top with asphalt patch. A short remedy for a potentially much bigger issue.

This is all aside from a very outdated kitchen and flooring which I agree is purely aesthetic, but considerable costs. It is a 3 bedroom with 1 bathroom. 1 bathroom I don't believe will be attractive to potential students. Converting to a 2 bedroom and studio may be possible, but is all additional cost on top of structural concerns previously mentioned.

We do not have a lump savings to cover the cost for this rehab. We have talked about taking out a HELOC, but then we are making payments on a home for an unknown amount of time for it to become rental ready. That is what led us to believe it would be easier to sell and turn the money directly over into a new build.

All of those concerns out in the open, I'm all ears. Rehabbing was our first thought and is not out of the question. Do you still think that would be the most viable in our situation? How would you go about financing the rehab? I assume our first step would be to get a quote from a structural repair contractor?
0 Reply
Kevin Sobilo
Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes
2y
Quote from @Anthony Pollachioli:

@Kevin Sobilo:

Tax implications are never based on local laws because we are talking about FEDERAL taxes. If local laws changed federal taxes localities would prevent residents from having to pay at all! A gift would of course be WORSE because then you would be on the hook for capital gains on the ENTIRE SALE PRICE.

What I suspect is that you "inherited it" but that when you transferred title into your name the deed showed $1 because that is allowed for close family transfers and avoids state transfer tax aka tax stamps on the sale. At least that's how it would be in my state. So, I suspect my original response may still be on point with regard to federal taxes.

I think your mindset about renters may need some re-evaluation. Renters, ESPECIALLY those who know they are only looking to rent for a finite period are generally focused on function over aesthetics. You aren't selling someone their forever home. You are renting them a place for a couple years max. So, updating a 1940s ranch is a perfectly reasonable sounding thing to do. In fact a 1940s ranch isn't even "old" in many parts of the country. For a rental in my market that would be NEWER than average as most rentals were built 1890-1920.

There are so many other options to consider. Could the house be converted to a 2 bedroom and studio? Could it be rented by the room rather than to a single tenant? Does it have a basement or garage that could be converted into livable space.

A remodel sounds to be like lower hanging fruit. Less investment, less time, less risk. So, I would try to look at that with fresh eyes and evaluate every possibility imaginable before dismissing it.

There is a tendency with people, especially new investors to want to create "what they like". What you like may or may not make the best sense as a rental investment. Me personally, it took me a while to understand what the expectations were for rentals in my market for different classes of rentals and it was much different than I would have expected at the beginning. For example a C class rental in my market is on average functional but VERY dated looking like the finishes are from the 1970s or early 1980s. This is what an entry level working class family expects to find on average here. This will vary from market to market, but you want to understand your market IS, NOT what you WISH it was.

For a renter you describe including a washer/dryer is probably more appealing to them than having a brand new modern aesthetic as in many markets those are not typically included. This is just one example of how expectations may differ from how a new investor might believe.

Not sure why I put "local" but re-reading the same article I read a few weeks ago, it does change the way the IRS views the sale. i.e. it is no longer considered a "sale" but a gift. The house was not inherited, it was sold for a $1 to us several years prior to the resident (a family member) passing away. Here is the link for reference, I'm sure you could make better heads/tails of it but we still plan on talking to a financial advisor. (https://ibuyer.com/blog/can-you-sell-a-house-for-one-dollar/... Regardless, we have considered your input and are willing to attempt to evaluate the cost of rehabbing versus selling and building. Here are our concerns;

- Some of the floor joists have been exposed to excessive moisture and are rotting away. There are a few joists I can physically stick a finger into the wood is so soft. This seems like a costly fix, as well as a rental safety concern

- The basement leaks, the basement is below ground and built into a hill, and there is always stagnant water in certain spots of the basement floor regardless of amount of rain, which only makes it worse. We have since put in a dehumidifier but too little too late it seems, I believe the basement will need to be sealed.

- The unattached garage (built into same hill) has drain run off that goes underneath the driveway and into the road. Drainage pipe is broken/clogged somewhere and water drains freely under the driveway. I recently had to fill a sinkhole that formed in the driveway that was at least a foot deep with gravel and top with asphalt patch. A short remedy for a potentially much bigger issue.

This is all aside from a very outdated kitchen and flooring which I agree is purely aesthetic, but considerable costs. It is a 3 bedroom with 1 bathroom. 1 bathroom I don't believe will be attractive to potential students. Converting to a 2 bedroom and studio may be possible, but is all additional cost on top of structural concerns previously mentioned.

We do not have a lump savings to cover the cost for this rehab. We have talked about taking out a HELOC, but then we are making payments on a home for an unknown amount of time for it to become rental ready. That is what led us to believe it would be easier to sell and turn the money directly over into a new build.

All of those concerns out in the open, I'm all ears. Rehabbing was our first thought and is not out of the question. Do you still think that would be the most viable in our situation? How would you go about financing the rehab? I assume our first step would be to get a quote from a structural repair contractor?

1. Wood rot is certainly serious, but depending on the extent might only require sistering new lumber besides the compromised sections. I haven't dealt with rot like that myself but I have dealt with joists that have split or that were compromised by a plumber carving them up like a turkey.

2. With basement water, the first place I look it outside the house. There are often things that can be done externally to help with the situation. Ranches have larger roofs so more water shedding from the roof during a rain. Directing that runoff away from the house is more of a priority with a ranch for that reason. Also grading the surface to force surface water to run away from the foundation even just a few feet can make a difference.

If a larger issue with the hill exists, I would bury drain tile and catch some of that water from the hill and direct it around and away from the house.

If I could not mitigate the issue sufficiently outside the house, then I would probably add a sump pit and perhaps some kind of perimeter drain in the basement in the most problem area.

Old home basement aren't meant to be perfectly dry like a modern house, but you do want to keep them from being constantly "wet" as opposed to occasionally damp.

3. I know you think of the kitchen remodel as a "considerable cost", but often times old cabinets can be refurbished by painting them and possibly changing hardware. Flooring can be a basic vinyl or even a DIY job using peel & stick flooring.

Expensive materials is more risk for the landlord because when they get damaged there is more likelihood you will lose money on the deal because collecting damages exceeding deposits if difficult.

Like I said, look at what typical rentals look like in your area. I suspect the typical is not exactly what you're now imagining.

4. I am not a fan of HELOCs when you need the money for long periods. I would just do a cash-out refi with a 30 year loan. You can probably get 75% of the appraised value So, over $100k. That will cover not only the rehab but also the mortgage payments and carrying costs until the rehab is done plus more to invest in whatever else you choose.

Rates are a bit high at the moment but try to get something without a prepayment penalty and then refinance in a couple years when hopefully rates are lower.

2 Reply
Anthony Pollachioli
OP
Member since 2024 · 14 posts · 3 votes
2y
Quote from @Kevin Sobilo:1. Wood rot is certainly serious, but depending on the extent might only require sistering new lumber besides the compromised sections. I haven't dealt with rot like that myself but I have dealt with joists that have split or that were compromised by a plumber carving them up like a turkey.

2. With basement water, the first place I look it outside the house. There are often things that can be done externally to help with the situation. Ranches have larger roofs so more water shedding from the roof during a rain. Directing that runoff away from the house is more of a priority with a ranch for that reason. Also grading the surface to force surface water to run away from the foundation even just a few feet can make a difference.

If a larger issue with the hill exists, I would bury drain tile and catch some of that water from the hill and direct it around and away from the house.

If I could not mitigate the issue sufficiently outside the house, then I would probably add a sump pit and perhaps some kind of perimeter drain in the basement in the most problem area.

Old home basement aren't meant to be perfectly dry like a modern house, but you do want to keep them from being constantly "wet" as opposed to occasionally damp.

3. I know you think of the kitchen remodel as a "considerable cost", but often times old cabinets can be refurbished by painting them and possibly changing hardware. Flooring can be a basic vinyl or even a DIY job using peel & stick flooring.

Expensive materials is more risk for the landlord because when they get damaged there is more likelihood you will lose money on the deal because collecting damages exceeding deposits if difficult.

Like I said, look at what typical rentals look like in your area. I suspect the typical is not exactly what you're now imagining.

4. I am not a fan of HELOCs when you need the money for long periods. I would just do a cash-out refi with a 30 year loan. You can probably get 75% of the appraised value So, over $100k. That will cover not only the rehab but also the mortgage payments and carrying costs until the rehab is done plus more to invest in whatever else you choose.

Rates are a bit high at the moment but try to get something without a prepayment penalty and then refinance in a couple years when hopefully rates are lower.

Thanks to your info, today I decided to call a foundation repair contractor and set an appointment in a few weeks to take a look at what needs to be done and give me an estimate. The floor joist and basement flooding issues both need to be addressed. In the old section of the house, there is a sump pump/pit and the new section of the house has a perimeter drain, but unfortunately there is still standing water. There doesn't seem to be a leak in the wall of the basement but rather general seepage through the cinderblock as a result of the hill it is built into. However I'm no expert and will hopefully get some more answers with the upcoming appointment.

As far as financing this rehab should we move that direction- I have read up on HELOCs, home equity loans, and the cash-out refi. Why are you not a fan of a HELOC? It seems to be the most sensible option given for us that our cost basis for the rehab is very up in the air. Is it the interest rate?
Can you elaborate more on what you mean when you say "That will cover not only the rehab but also the mortgage payments and carrying costs until the rehab is done plus more to invest in whatever else you choose." You'll have to excuse my naivety, what are carrying costs?
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Anthony Pollachioli
OP
Member since 2024 · 14 posts · 3 votes
2y
Also, and sorry for all the questions- for our situation would you recommend consulting with a financial advisor or an accountant? I have been getting mixed answers. We would like to talk to somebody who is knowledgeable with real estate investing (aside from yourself, of course) who can help us through the process of determining all of the what, where, and how with this property. Would you recommend we work with a CPA? A financial advisor who specializes in real estate rentals/investment? Thanks in advance!
0 Reply
Kevin Sobilo
Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes
2y
Quote from @Anthony Pollachioli:

Quote from @Kevin Sobilo:1. Wood rot is certainly serious, but depending on the extent might only require sistering new lumber besides the compromised sections. I haven't dealt with rot like that myself but I have dealt with joists that have split or that were compromised by a plumber carving them up like a turkey.

2. With basement water, the first place I look it outside the house. There are often things that can be done externally to help with the situation. Ranches have larger roofs so more water shedding from the roof during a rain. Directing that runoff away from the house is more of a priority with a ranch for that reason. Also grading the surface to force surface water to run away from the foundation even just a few feet can make a difference.

If a larger issue with the hill exists, I would bury drain tile and catch some of that water from the hill and direct it around and away from the house.

If I could not mitigate the issue sufficiently outside the house, then I would probably add a sump pit and perhaps some kind of perimeter drain in the basement in the most problem area.

Old home basement aren't meant to be perfectly dry like a modern house, but you do want to keep them from being constantly "wet" as opposed to occasionally damp.

3. I know you think of the kitchen remodel as a "considerable cost", but often times old cabinets can be refurbished by painting them and possibly changing hardware. Flooring can be a basic vinyl or even a DIY job using peel & stick flooring.

Expensive materials is more risk for the landlord because when they get damaged there is more likelihood you will lose money on the deal because collecting damages exceeding deposits if difficult.

Like I said, look at what typical rentals look like in your area. I suspect the typical is not exactly what you're now imagining.

4. I am not a fan of HELOCs when you need the money for long periods. I would just do a cash-out refi with a 30 year loan. You can probably get 75% of the appraised value So, over $100k. That will cover not only the rehab but also the mortgage payments and carrying costs until the rehab is done plus more to invest in whatever else you choose.

Rates are a bit high at the moment but try to get something without a prepayment penalty and then refinance in a couple years when hopefully rates are lower.

Thanks to your info, today I decided to call a foundation repair contractor and set an appointment in a few weeks to take a look at what needs to be done and give me an estimate. The floor joist and basement flooding issues both need to be addressed. In the old section of the house, there is a sump pump/pit and the new section of the house has a perimeter drain, but unfortunately there is still standing water. There doesn't seem to be a leak in the wall of the basement but rather general seepage through the cinderblock as a result of the hill it is built into. However I'm no expert and will hopefully get some more answers with the upcoming appointment.

As far as financing this rehab should we move that direction- I have read up on HELOCs, home equity loans, and the cash-out refi. Why are you not a fan of a HELOC? It seems to be the most sensible option given for us that our cost basis for the rehab is very up in the air. Is it the interest rate?
Can you elaborate more on what you mean when you say "That will cover not only the rehab but also the mortgage payments and carrying costs until the rehab is done plus more to invest in whatever else you choose." You'll have to excuse my naivety, what are carrying costs?

I dare say there is no leak in your foundation. Foundations of that era were not meant to be water tight. Concrete is naturally pourous. Back when that house was built it wasn't really a consideration to finish basements. That started to come into vogue decades later and after that I think new basements started to be made dry with an eye towards future finishing and use.

My first thought would not be a foundation repair, it would be to catch the water from the hill OUTSIDE the house and direct that water somewhere else making the soil against the house on that side less wet.

There is nothing wrong with a HELOC. Its a fine product. I have one myself that I use mainly as an emergency fund and occasionally to take advantage of an opportunity that pops up. I once used it to buy a house when I wasn't looking but where the deal was too good to pass up. I paid it back within 4-5 months. I am about to tap it again to complete 1 rehab and to start another, but plan to pay it back within a few months when I complete a refi on another property.

In my opinion the best use of a HELOC is for short term needs like a credit card. Typically HELOCs have adjustable rates and if the banking climate changes I believe the lender can actually cancel them at their will.

When I am going to hold a property for the long term, I want to finance it with a long term type of financing. Also, you are more secure with a larger loan. If you get sued, there is less equity for the other party to go after. Also, by taking a larger loan, you have funds you can invest elsewhere which helps you grow faster.

Another example of a good use for a HELOC would be a HELOC against a primary residence to use for doing flips. This is a common scenario. The use is occasional because these are small time flippers who might flip 1 house every 1-3 years. They pay it all back after the sale of the flip and there is time in between when they don't need any money from the HELOC and don't have to pay any interest.

Carrying costs are the cost to hold the property when it isn't renting and bringing an income. So, taxes, insurance utilities, etc that you need to pay for several months while doing the rehab.
0 Reply
Kevin Sobilo
Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes
2y
Quote from @Anthony Pollachioli:

Also, and sorry for all the questions- for our situation would you recommend consulting with a financial advisor or an accountant? I have been getting mixed answers. We would like to talk to somebody who is knowledgeable with real estate investing (aside from yourself, of course) who can help us through the process of determining all of the what, where, and how with this property. Would you recommend we work with a CPA? A financial advisor who specializes in real estate rentals/investment? Thanks in advance!

I could be wrong, but I don't know if you'll find a professional financial advisor who has expertise in real estate investing.
Whether you get financial/strategic advice from anyone else, I think you would want an accountant who can give you tax advise specifically.
For strategic advice, try to find local investors whom you can talk to. Search around and find local meet-ups for real estate investors and meet some. Many will be happy to talk and give advice on your situation and if they are local they may even be willing to come see the property in person.
0 Reply
Anthony Pollachioli
OP
Member since 2024 · 14 posts · 3 votes
2y
Quote from @Kevin Sobilo:
I dare say there is no leak in your foundation. Foundations of that era were not meant to be water tight. Concrete is naturally pourous. Back when that house was built it wasn't really a consideration to finish basements. That started to come into vogue decades later and after that I think new basements started to be made dry with an eye towards future finishing and use.

My first thought would not be a foundation repair, it would be to catch the water from the hill OUTSIDE the house and direct that water somewhere else making the soil against the house on that side less wet.

There is nothing wrong with a HELOC. Its a fine product. I have one myself that I use mainly as an emergency fund and occasionally to take advantage of an opportunity that pops up. I once used it to buy a house when I wasn't looking but where the deal was too good to pass up. I paid it back within 4-5 months. I am about to tap it again to complete 1 rehab and to start another, but plan to pay it back within a few months when I complete a refi on another property.

In my opinion the best use of a HELOC is for short term needs like a credit card. Typically HELOCs have adjustable rates and if the banking climate changes I believe the lender can actually cancel them at their will.

When I am going to hold a property for the long term, I want to finance it with a long term type of financing. Also, you are more secure with a larger loan. If you get sued, there is less equity for the other party to go after. Also, by taking a larger loan, you have funds you can invest elsewhere which helps you grow faster.

Another example of a good use for a HELOC would be a HELOC against a primary residence to use for doing flips. This is a common scenario. The use is occasional because these are small time flippers who might flip 1 house every 1-3 years. They pay it all back after the sale of the flip and there is time in between when they don't need any money from the HELOC and don't have to pay any interest.

Carrying costs are the cost to hold the property when it isn't renting and bringing an income. So, taxes, insurance utilities, etc that you need to pay for several months while doing the rehab.

Yes I believe you are correct, there is no true leak in the foundation but rather runoff from the hill above it needs to be rerouted around the home. We actually sat with a lender today and went over financing options for a rehab. I believe we are going to go with the cash-out refi though he also suggested using a construction loan which would have delayed principal payment period if we thought the rehab process would take a long time. He said since the property is not our primary residence, we could not take a HELOC on it.

Our plan as of now is to gather quotes for things that need to be done such as the floor joists and grading. Another major cost to rehab I did not mention, having the electrical rewired as it is certainly not up to code. Additionally there is a drain in the garage that runs under the driveway and to the road that is backed up (or collapsed, though I dont even want to think about that as we would have to tear up the driveway to fix it), and we believe it is also causing water to run into the basement. Each of these major concerns (aside from general remodeling costs) were considerations in deciding to sell and build a modular.

However, we are going to do our due diligence and consider the cost to rehab versus selling and building. Once we gather some quotes and look at what all truly needs to be done we should have a clearer picture. In case you were interested in the cash-out refi loan- looking at 15 year 7.25%-7.65% (yikes) 3 yr or 5 yr ARM with no early payment penalty. Closing costs are variable but about 2-3% of loan amount.
0 Reply
Kevin Sobilo
Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes
2y
Quote from @Anthony Pollachioli:

Quote from @Kevin Sobilo:
I dare say there is no leak in your foundation. Foundations of that era were not meant to be water tight. Concrete is naturally pourous. Back when that house was built it wasn't really a consideration to finish basements. That started to come into vogue decades later and after that I think new basements started to be made dry with an eye towards future finishing and use.

My first thought would not be a foundation repair, it would be to catch the water from the hill OUTSIDE the house and direct that water somewhere else making the soil against the house on that side less wet.

There is nothing wrong with a HELOC. Its a fine product. I have one myself that I use mainly as an emergency fund and occasionally to take advantage of an opportunity that pops up. I once used it to buy a house when I wasn't looking but where the deal was too good to pass up. I paid it back within 4-5 months. I am about to tap it again to complete 1 rehab and to start another, but plan to pay it back within a few months when I complete a refi on another property.

In my opinion the best use of a HELOC is for short term needs like a credit card. Typically HELOCs have adjustable rates and if the banking climate changes I believe the lender can actually cancel them at their will.

When I am going to hold a property for the long term, I want to finance it with a long term type of financing. Also, you are more secure with a larger loan. If you get sued, there is less equity for the other party to go after. Also, by taking a larger loan, you have funds you can invest elsewhere which helps you grow faster.

Another example of a good use for a HELOC would be a HELOC against a primary residence to use for doing flips. This is a common scenario. The use is occasional because these are small time flippers who might flip 1 house every 1-3 years. They pay it all back after the sale of the flip and there is time in between when they don't need any money from the HELOC and don't have to pay any interest.

Carrying costs are the cost to hold the property when it isn't renting and bringing an income. So, taxes, insurance utilities, etc that you need to pay for several months while doing the rehab.

Yes I believe you are correct, there is no true leak in the foundation but rather runoff from the hill above it needs to be rerouted around the home. We actually sat with a lender today and went over financing options for a rehab. I believe we are going to go with the cash-out refi though he also suggested using a construction loan which would have delayed principal payment period if we thought the rehab process would take a long time. He said since the property is not our primary residence, we could not take a HELOC on it.

Our plan as of now is to gather quotes for things that need to be done such as the floor joists and grading. Another major cost to rehab I did not mention, having the electrical rewired as it is certainly not up to code. Additionally there is a drain in the garage that runs under the driveway and to the road that is backed up (or collapsed, though I dont even want to think about that as we would have to tear up the driveway to fix it), and we believe it is also causing water to run into the basement. Each of these major concerns (aside from general remodeling costs) were considerations in deciding to sell and build a modular.

However, we are going to do our due diligence and consider the cost to rehab versus selling and building. Once we gather some quotes and look at what all truly needs to be done we should have a clearer picture. In case you were interested in the cash-out refi loan- looking at 15 year 7.25%-7.65% (yikes) 3 yr or 5 yr ARM with no early payment penalty. Closing costs are variable but about 2-3% of loan amount.

As for electrical a few things to think about:

1. It actual IS up to code! The code it needs to meet is the code in place when the work was done. The exception to that would be health/safety items required to rent/occupy is such as GFCI outlets in appropriate locations.

2. A ranch is easier to do electrical work because you can run rough electrical from above or below and fish wires where they need to go without making many holes in walls etc.

3. Depending on what you are starting with you don't necessarily need to rewire the whole house. So, if budget becomes an issue dig into what upgrades make the most sense. I have rewired a whole house, but most times I do significant upgrades without spending the money on a complete rewire.
0 Reply
Anthony Pollachioli
OP
Member since 2024 · 14 posts · 3 votes
2y
Quote from @Kevin SobiloAs for electrical a few things to think about:

1. It actual IS up to code! The code it needs to meet is the code in place when the work was done. The exception to that would be health/safety items required to rent/occupy is such as GFCI outlets in appropriate locations.

2. A ranch is easier to do electrical work because you can run rough electrical from above or below and fish wires where they need to go without making many holes in walls etc.

3. Depending on what you are starting with you don't necessarily need to rewire the whole house. So, if budget becomes an issue dig into what upgrades make the most sense. I have rewired a whole house, but most times I do significant upgrades without spending the money on a complete rewire.
Would an electrician be a good person to talk to to determine if it meets legal requirements for renting? Who is the authority that inspects to determine if the house meets rental regulations for safety?

I once had a patient who is an electrician and owns his own company. Very reliable guy. I plan on contacting him soon to get a quote.
0 Reply
Kevin Sobilo
Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes
2y
Quote from @Anthony Pollachioli:

Quote from @Kevin SobiloAs for electrical a few things to think about:

1. It actual IS up to code! The code it needs to meet is the code in place when the work was done. The exception to that would be health/safety items required to rent/occupy is such as GFCI outlets in appropriate locations.

2. A ranch is easier to do electrical work because you can run rough electrical from above or below and fish wires where they need to go without making many holes in walls etc.

3. Depending on what you are starting with you don't necessarily need to rewire the whole house. So, if budget becomes an issue dig into what upgrades make the most sense. I have rewired a whole house, but most times I do significant upgrades without spending the money on a complete rewire.
Would an electrician be a good person to talk to to determine if it meets legal requirements for renting? Who is the authority that inspects to determine if the house meets rental regulations for safety?

I once had a patient who is an electrician and owns his own company. Very reliable guy. I plan on contacting him soon to get a quote.

@Anthony Pollachioli, I would talk to other local investors. They could probably help you a low with developing your scope of work especially one who specializes in rentals. Anyone you will potentially hire has a dog in the fight. They are there to make money for themselves whereas you want to make money for you.
They will often recommend what is easiest and most profitable for them over what is best for you. They will know current code but may not know specifically what a municipality would require for renting. So, whenever hiring tradespeople its good to have someone who knows enough to evaluate the technical issues and craft a scope of work that suits you not just what the tradesperson might recommend.
It's probably pretty basic such as at least 1 GFCI outlet in each bathroom (some older bathrooms have ZERO outlets). Plus GFCI outlets wherever else code requires such as kitchen, laundry, basements, etc.
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