This is a wholesale property which comps are at $158k but selling for $108k. The GC came in with an estimate of $23k for everything that it needed, so the offer went down to $101,500. I'm focusing on capital gains, not cash flow (which would be about $3k/year), but the capital gains would be about $21k with $22k out of pocket. Would you do this deal?
What is the length of the project? Cost of holding (tax, interest, points, hard money)? Do you have a transfer tax?
It looks like you have around 10k buffer, which is around 6% of your sold price, so the agents commissions.
The risk that I dont like in your situation is that if you can't sell, you can't refinance your base money out, since 75% is less than your aquisition + repairs. So not only you because a landlord without wanting to, your startup cash is locked in as equity.
Not a chance I would do that deal at that price. You are underestimating your costs. There are a lot of hidden costs in real estate.
First you didn't say whether you are keeping this property as a rental or rehabbing it to sell. The evaluation of the deal would differ slightly depending on what you want to do.
If you are going to keep it as a rental, you will not have "Capital gains" until you sell it. What you will have is "equity". But you equity will not be 22K because you will have holding costs during the renovation and closing costs. That could easily be 10K
If you are going to rehab and flip; her is a typical evaluation
after repair value (ARV) $158K
X 70% = 110.6
minus the repairs needed 110.6-23= $87.6K
Most investors would say that is the most you should pay. That is a quick crude evaluation and you should run real numbers but that would be a ballpark number.
The fact you didn't account for closing costs in your equity calculation tells me you probably haven't accounted for enough costs when you came up with the $3K a year cash flow estimate.
Search the site here for the 50% rule and the 70% rule. They will help you evaualte deals.
I factored in 6 weeks till leased with holding costs being $2,340 (already factored into the cash out of pocket). I am doing hard money loan. No transfer tax.
I'm really new to REI, can you tell me how you got the $10k buffer? And what does buffer mean? I was planning on renting for 1-2 years to get experience in that, but I don't know if that's a bad idea.
@Ned Carey I'm keeping the property as a rental, and am planning on waiting to see the capital gains. I tried attaching the document I used to do the math, but can't seem to know how to do it correctly. But anyway, the holding costs and interest were all included in the initial amount out of pocket. I'm hoping I don't need to add anything else. Also, I went to a workshop where they mentioned that if the rehab was more than $10k, not to do it. I don't know if everyone follows that advice.
Originally posted by @Aroldo Villarreal :
. Also, I went to a workshop where they mentioned that if the rehab was more than $10k, not to do it.
That is some of the silliest advice I have heard. Now perhaps it is out of context and they were recomending that a new investor should stick with an easy rehab. That is sound advice. However $10K is an arbitrry number and if something is a great deal that shouldn't stop you.
@Aroldo Villarreal I don't have enough details to know if your deal works as a buy and hold. Do you have financing lined up after the hard money loan, and what are the terms? What's your expected monthly rent?
What about ongoing monthly expenses (taxes, insurance, property management, maintenance, etc.)?
How long will the rehab take, and is 6 weeks realistic to get it rehabbed and rented? Depending on the market, it could take several weeks to rent, and that assumes the property is ready to show. Also, you might show the property in May, and find a great renter who wants to move in July. You'll have to cover all expenses in the interim. Just an example to consider.
Many new investors focus too much on potential income and not enough on potential expenses. Keep running your numbers and good luck.
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