Newbie investor here, considering placing an offer on my first property....but am worried about taking on too much for my first deal. Would love some advice from experienced investors! Apologies in advance for the lengthy post.
The property is a tri-plex in a small, lesser known town outside of the SF Bay Area. It consists of a side-by-side duplex and a separate unit behind it that is what the selling agent describes as a “shell”. We did a walk-through with a contractor who helped us determine the SOW. Total reno (between both buildings) is 200k. We are planning on using a 203k loan to finance the property and renovation.
My big hold-up on placing an offer is how huge the renovation would be. The front house needs big ticket items done - there aren’t even any interior walls (roof, windows, a little foundational work, update electrical, carpets) but is in “good” condition otherwise. The back house needs everything: from insulation to interior walls, flooring electrical, plumbing, kitchen, bathroom etc. The contractor (whom has great references and works with investors in the area and is an investor himself) said that the house has great bones and structure. I also feel like I should say that this contractor is booked, so unable to do the work, and came out just for the walk through and I felt he didn’t have any motive to be diss honest - he actually ended up not even charging us for the 2 hours he spent there.
Other than that, it works as a cash flowing property with decent returns. We have done our due diligence and have been listening to podcasts and studying/analyzing properties for 3 years, so we feel as if we are as ready as we can be without the hands-on experience. It’s HARD (impossible?) to find house hacking deals as a newbie around our area without having a 3 hour commute into the bay, which is why we are actually considering taking this on!
Thoughts/advice? Terrible idea?
Thanks in advance!
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Without looking deeper into numbers ( purchase price, ARV, potential expenses, cash on cash...) it's hard to see if the deal is worth the hassle.
If this is your first deal as an investor I would say this is really bad and to complex project to take since you do not have to much experience. Bay Area and surrounding cities are a tough market for flips and BRRRR, the deals are still there but it's hard to find it. Anything remaining is a total flip to the extend of almost building a new construction.
Also, what are your RE goals?
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@Marcin: My plan scale slowly - purchase one property, 2 the following year, 3 the year after etc. We are not necessarily in it for large cash flow, we see it more as a "retirement plan" (but cash flow doesn't hurt, allows us to build more capital for further investments etc) Our plan was start next year (were planning a move to Nashville, TN area) but my husband has a great job offer that might keep us here for another 2 years, so we started exploring options and found this small town outside of Brentwood/Antioch that seemed feasible. It's an ineresting market - VERY different from the bay area. I'm a bay native and have never heard of the town before this, but I imagine with the insane growth here it is only a matter of time before it's discovered (also new development plans and growth happening). This prop is not necessarily the best monthly cash flow, but fits what we are looking for and allows us to not have to hold off another 2 years.
Here's the quick and dirty:
Purchase: $250k (max)
Reno: $175-200k (pending deeper inspection of roof and foundation)
ARV: $475-480k, per our 203k consultant who is also an appraiser
Monthly Rent: $3,950 - $4,000
PITI: approx 3,000-3,100
Other Expenses: vacancy 5%, Repair/Maintenance/Capex: 6.5k/year (all major repairs done during reno, budgeted low for capex)
Cash Flow: approx $150-200/month, depending on interest rates/PITI payment
Cash on Cash/ROI: 7% the first year (due to reno) and 9% there-after.
@Colleen: Ah, that was a typo - the front property has walls! The kitchen and bathroom need minumal work (it's fine as a rental) but it does need roof, foundation etc as those items were neglected by the previous owner. One side is currently rented and would be able to stay rented with the work needed, which would help with holding costs during reno (which is projected only abot a month on the duplex). The back house is the one that needs more walls, etc. See my analysis above re: cashflow. I'm definitely worried about the scope of the reno, that's our biggest hold-back!
@Hoteenia: To clarify - I meant those as 2 separate items: we have done our due diligence on the property - we have been working on this deal for close to 2 months now. And re: podcasts/research, I merely meant that we have been interested in REIfor several years, have a good amount of general knowledge, and I feel there comes a point that you need to pull the trigger and learn the nuances as you go. I don't think listening to podcasts is any sort of qualification, lol - we are just ready to make it happen. But want to make we are not getting in over our heads on this first deal.
I don’t know the California housing market at all really but if you’re moving to Nashville soon, even in the next couple years, I wouldn’t bother with that Cali purchase. You’ll find so much better deals in Nashville. I’m in Knoxville but watch the Nashville market very closely, it’s my wife and my’s favorite city and we travel there often. What happens when you move somewhere and then you have to hire prop management or your numbers are slightly off? You’re going to be supporting that Cali deal financially, and therefore emotionally as well. Not to mention the California housing market in general is slowing right now and we’re in a housing bubble.
Kim - based on the numbers you provided this is no go. You will be doing all these reno just to make $30k/$50k in equity if all goes as planned.... 10% of the ARV, plus I am not counting holding costs, that would eat up all your equity that you made on the flip. The general idea of fliping/ BRRR is to get to 70%-75% of total cost vs ARV so you can make some money selling or do the cash out refi to get your funds out to reinvest.
If you are just planning to buy and hold I would focus on finding a turn key property in the area you described , also Central Valley , Sacramento , Antioch, Pittsburg are perfect places for cash flow properties . Or you can keep looking for a better deal to flip.
I am really familial with this market and I see good opportunities there sometime , I've been working with couple clients there recently. PM me if you are interested to hear more.
I agree woth @Marcin Zajac the spread is minimal especially with the unknowns. It does sound like a great story if you were to do it though! Best of luck in whatever you choose.
@Kim Johnson if you want to send the numbers I can tell you what I think. Some people on here are from locations where there is great cashflow. I started in seattle which is really similar to CAA properties.
Search the rent to value ratio in the forums for more info.
Let me know when exactly you plan on moving to Nashville. I have a few houses for sale that would make great primary residences.
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