New to Real Estate · Milwaukee, WI · Member since 2019 · 11 posts · 1 vote
Hi all! I am going to buy my 1st investment duplex in the next 4 months (BRRRR) and I'm tired of running myself in circles, but am not sure which route is smarter.
I am highly considering buying a foreclosed property from the city I live in for about $1,000 cash. The rehab estimate is 50k-60k for total gut in and out (foundation is good though). Houses in this area at mediocre condition sell for 50k-75k. I am attracted to this route because the property can be mine for $1,000 cash, and the rehab budget would put me at retail price, *AND* I will have the peace of mind of knowing that I have essentially a brand new house. No major costs should pop up anytime within the 5-7 year period I plan to hold it. However, I'm not sure what kind of financing is appropriate for me to do the 50k-60k rehab or if this is even the better option.
I am afraid to buy an already decent property (I am adamant about this area) for the 50k-60k retail price and then have a disaster of things go wrong while I'm trying to cashflow it/get my footing.
Please offer your thoughts in as much detail as possible. Thank you!!
@KB Bjerk I am not the type to discourage anyone, but if you're trying to weigh out the risks, I would say trying to do a full rehab is much riskier than buying retail or turnkey. One requires minimal work and the other is going to be a massive project. Also, the risk of "disasters" coming up and eating your cash-flow is there regardless of a full gut rehab or not. Sure, the rehab gives you the comfort of knowing that everything is new. But one bad tenant can still wipe out your cash flow. I think an important thing that a lot of new investors forget is "location, location, location". The fact that you want to invest in a neighborhood where prices max out at 75k, while Milwaukee's median home price is around 130k tells me you may be looking at a low end area that have more problematic tenants. Before you dive in, research what types of tenants you're going to be renting to. And read up on the pros and cons of investing in these areas. You can absolutely make money, but I found that these types of areas are not best for new investors. But if you're confident in what you know, go for it! I don't know too much about your market, so read my comment with a grain of salt.
@KB Bjerk if this is your first property you are much more likely to mess up a major rehab than have things go so drastically wrong on a mediocre hold. It seems like you really like the idea of the $1k purchase price even though that means nothing. The choice is buy something that will sit vacant for months while you rehab it for $60k and hope things go wrong, or buy something for $60k get someone in there immediately and hope things don't go wrong.
@KB Bjerk I am not the type to discourage anyone, but if you're trying to weigh out the risks, I would say trying to do a full rehab is much riskier than buying retail or turnkey. One requires minimal work and the other is going to be a massive project. Also, the risk of "disasters" coming up and eating your cash-flow is there regardless of a full gut rehab or not. Sure, the rehab gives you the comfort of knowing that everything is new. But one bad tenant can still wipe out your cash flow. I think an important thing that a lot of new investors forget is "location, location, location". The fact that you want to invest in a neighborhood where prices max out at 75k, while Milwaukee's median home price is around 130k tells me you may be looking at a low end area that have more problematic tenants. Before you dive in, research what types of tenants you're going to be renting to. And read up on the pros and cons of investing in these areas. You can absolutely make money, but I found that these types of areas are not best for new investors. But if you're confident in what you know, go for it! I don't know too much about your market, so read my comment with a grain of salt.
I agree with the market you are looking in. If it is not an appreciating market I would not do a full rehab even for $1000 house. With that said, if you purchased a big rehab in a growing market or had an experienced partner I think you should look at property you can create equity in instead of turn key. You will learn more. The learning even on a break even deal is better than a turn key meant for investors that do not want to learn this business. Good luck!
@Kaitlyn Bjerk have you thought about near turn key? With this, I mean, you can rent it out as is and make improvements over time. With all investing in RE it is about location, location, location..
I love full gut renovations. HOWEVER, I also understand the construction aspect very well. I can tell you this much...if I'm doing this much renovation work, I'm NOT doing it to be all in at full retail. I'm doing it because I got a great deal and my knowledge allows me to build equity in the property. Don't let the $1,000 purchase price fool you, it's all about your total cost basis and your all-in costs to get the property to make money for you.
To truly answer your question, neither of the options your proposed seem to be a good idea on your first investment based on the numbers you gave. Good luck and keep searching! Don't let emotion and the desire to already be in real estate. Find the RIGHT deal and pull the trigger!
@KB Bjerk I think you might be biting off more than you can chew with a full gut job as a new investor, This can be pretty risky and it's quite easy to underestimate your rehab costs. I don't know your market but in Indianapolis, these $1,000 properties that you buy from the city are generally in pretty bad areas and I suspect that's the case in yours. Personally, I think i buying these cheap properties in marginal at best areas is far more risky than buying something in a better area even if it hasn't been fully renovated. Buying a rental property in a bad neighborhood is a mistake that you can't overcome. Anything else that might go wrong can be fixed but you can't move a house.
@KB Bjerk I agree with Mike (as usual.) If you don't already have experience managing GC's and large projects, you will likely find yourself exceptionally frustrated. I did several small deals and oversaw other projects from OOS investors before taking on my first gut and it was still pretty tough. The larger the job... the more that will go wrong. That doesn't mean that you shouldn't do it, it just means that you should go in prepared. I recommend visiting your local REIA and trying to connect with someone who has experience in your area to consult with. Be sure to fill your network and have people you can call when you have questions.
It's not just the construction side of things that can be difficult. Ensuring that GC's are showing up, getting ample work done in a timely manner, and working according to your expected quality is important, but you may run in to red tape with the city and/or utility companies as well. Everything from permits to having things certified as safe before getting the utilities on. You will also want to make sure that you put your exit strategy on a timeline. If your rehab finishes the week after Thanksgiving, good luck selling or renting for a couple of months. Also, your appraisal may vary depending on the time of year and recent sales activity. There are lots of components when pulling together a successful deal.
Personally, I believe that your first deal should be solid and relatively straightforward. It's easier to build a portfolio around something that isn't a ton of headaches and cash flows predictably and consistently. Finding a local mentor will go a long way and many of us are open to sharing all kinds of information over a cheap dinner (not too cheap...) Real estate is fun and addicting and most of us investors love to share our stories and experiences. Best of Luck!!!
I'm not totally sure how buying at retail for a functional property would be more risky than a total gut job. And how would you be into that gut job for only $1000? What about the 50-60K for the rehab? And what if the rehab doesn't go as planned or ends up being more expensive, or what if you can't get it finished because you ran out of money? I'd also caution on the inherent risk factor of any property in this nation costing only $1000. That's red flag central. Being that you're in Milwaukee, and there's a million investors there, if none of the experienced people have scooped it up for a measly $1000, there's probably a reason for it.
@KB Bjerk I usually have words of encouragement, but I am not doing you any favors by sugarcoating this! Your logic is interesting and I can see why it makes sense to you, but execution and reality will be a problem, financially and personally for you.
As mentioned a full gut rehab is not an ideal first project; there is too much to go wrong. First of, not every contractor is willing to work in the inner city. They worry too much about their tools, their truck and their health. If you don't have experience in choosing and managing contractors you might just end up with a hack job or worse with a half finished hack job and your money gone.
Second, the financial model does not work on many sub 100k houses. Typically capex exceeds cash flow and investors dont realize that until a few years in when they start loosing money year after year.Your approach combats that a little, but you will still spend more on the property than it will be worth, so you have the risk of negative equity.
Finally, managing rental properties in the inner city is no easy task. This is why reputatbe and seasoned PM's will not take on properties in thoses areas. They know better from experience. Between tenents, neighbors, crime, city code enforcement you are caught in a very abravise situation that can get under your skin very quickly with no good way out. Did I mention that selling these properties is not easy either - buyers just can't qualify for a loan, or they loose their job a day before closing (happened to me last week) - you won't believe the stories...
Just to give you some perspective: I have been in the buy and hold game in Milwaukee for over ten years, I have bought and sold in all kinds of neighborhoods and since I am also a full time agent and work a lot with investors I get a front seat in their deals and experiences and as much as I like to share from my personal experience I can learn with and from them on every deal. I have bought city properties with clients and if anything it made me feel better about my own startegy and investing in the suburbs.
If that does not convince you: Ali Boone is making a very good point: if this would be a good idea you have to ask yourself why non of the experienced guys buy cheap properties?
Real estate investing is such a fantastic tool and has the power of changing your life forever. I believe that the most important thing on your first deal is that it goes well and does not blow up in your face. You don't need to make all your money on your first property. Just make sure you have a good experience, make a few bucks and feel confident for #2. The learning curve is very steep on the first one.
Maybe consider house hacking - buy a duplex in a decent area with low money down. There will be plenty of things to fix and upgrade, you get your feet wet with landlording etc.
@Jonathan Oh Jonathan, thanks so much for your sincere input. Definitely made me think more and come to a decision that feels better for me and not so aimless. I appreciate you!
@Alex Olson Very good point. I think after many people's feedback, that's what I ought to do. Thank you for helping me steer my thoughts in that direction Alex!
@Ross Denman Thank you Ross. Your last paragraph felt true to me. Getting through my first deal without extreme tragedy and gaining confidence is more important than I realized.
Aside from what the other have said, your financing option is cash. Period. It can be yours or your friends/family’s, but banks don’t lend on this kind of thing and it’s too cheap to do hard money.
What you’re describing is probably the riskiest strategy one can take starting out so I’d leave that to the pros. You’ll learn enough just through the process of doing an easy turnkey or light rehab. Good luck!
@Marcus Auerbach thank you so much. Your response felt like the all around advice I was looking for from someone, and the fact that you know exactly what market/intricacies I would be facing is extremely helpful. Thanks for being a kind, firm, and knowledgeable voice. I am definitely going to think more and be more meticulous about my plan. I let my emotions and desire to take action lead me. I've decided I'm going to rent for a bit longer and keep saving capital until I'm in a better spot for more convention financing. I don't have anyone in my current circle who has done real estate, at least not to the degree I want to. So your advice is invaluable. Thank you!
@KB Bjerk For your first property. I would recommend doing a semi-stabilized, light value add property. That way you can learn a lot and won't get yourself annihilated from the risks involved with the foreclosure property.
I am on the other end, having made 1 of those choices already, wishing I had made the other choice. I bought an older house that needed to be rehabbed, big time. I had been listening and reading from BiggerPockets but didn't really internalize all that info and didn't TRULY know what I was doing (I imagine you are wiser than that). All to say, I spent all my savings on the rehab, did it inefficiently, and was incredibly stressed trying to manage everything. I didn't know what I didn't know. All this time (7 months later), I wish I had just bought something more rent ready (with some rehab) and house hacked for a year. You may not be in that situation to house hack, so I would advise buying something with light rehab needed. You'll learn a ton and be able to handle something 1.5x more the next time - as David Greene mentioned in one of the podcasts. I've learned a lot during this, but now I'm looking for a property to BRRRR and need to raise funds to do so. If I would have lightly rehabbed, I'd still have learned a lot and would be ready for something a little bit bigger without having to wait to save my own capital.
@Kaitlyn Bjerk the 50-60k rehab could turn into 100k with an appraisal below that. I would stick to the brrr strategy but with a higher class property with less work involved. It seems like you want to scale so brrr over turnkey seems like a better option.
@Pat Dansdill Pat thanks so much for the connection. I'm definitely looking to house back and after reading everyone's responses, I am glad I haven't pulled the trigger yet. I don't have enough reserves NOR experience with contractors, etc to pull off a big rehab right away. You are totally right and I'm motivated by your point: buy one with light work needed, do it as I can, and gain confidence to take it a step further the next time and so on.
I'm sorry yours didn't turn out the way you hoped. It sounds like it didn't have the power to totally annihilate you, which is good. And you learned something through it as well as were able to share a piece of that lesson with me to help me not make the same mistake. Keep on keeping on and good luck in the future! 💪