Options for a distressed property in a great location?

Question

I'm just getting started in REI and have been loving meeting so many people and diving into all of the resources available on BiggerPockets. I have been looking for a house hack in my local market, but I also have a potential opportunity to help a family member who is living in a house that's falling apart.

Said family member bought a 2,000 sqft, 3bd/2ba, brick, row house 15 years ago in a great neighborhood in Richmond, VA that has appreciated a lot over time. They bought it with the intention of fixing it up, but the work has been more than they've been able to handle and the house has continued to fall apart over the years. They are still living there, despite me constantly telling them to move out, sell the house, and find somewhere more hospitable.

However, I've been mulling over the idea of helping them with a BRRR (I don't know if they'll want to repeat). It would need to be completely gutted and rehabbed, it could potentially be divided into two separate units, the Zestimate value is around $400k, and a nearby comp sold for over $500k last year.

I have a basic understanding of the BRRRR strategy but the details are still tough for me to grasp, so I'm wondering:

- About how much would it take to gut/rehab the house?

- If the ARV was $400k, how much can you pull out? 70-80% of that value?

- Assuming it appraised at $400k and they could pull out 75% ($300k), approximately how much would the new mortgage be? I guess this is the biggest question, as this defines whether or not this would be viable. The house (or larger unit if it were to be sub-divided) would need to rent for quite a bit above the new mortgage amount for this to work, right?

I know this is a long post and asks a lot, but any insight/advice would be greatly appreciated! I know this would be a big project to take on just getting started, but it seems like a great way for them to be able to keep the house, bring it back to life, and also turn it into an investment property. Thanks so much.

Lindy Pond · Answer

Start with the end in mind! Who is going to live in the house in the end, you, the family member? Or are you going to sell it, or keep it as a rental?
If you want to divide it into a 2-unit, have you talked to the city to see if that is even possible with this specific property. And if so, what does that involve?
Unless you have enough cash for all of this, you will need financing for this project. The answer above will help you determine what financing options you might have, if any in this current market.
I am happy to discuss any of this with you.

Sarah Stamper · Answer

@Matt Carozza hi Matt, I would be cautious about taking on an old house if it’s your first project. Try to find something newer that needs mostly cosmetic work when first getting started. Also fixing up a house for a family member that doesn’t have the money? Hhhhmm... Sounds complicated. I would look for an easy first deal. One that you can maybe live in & work on. Try to talk to as many investors before taking on your first BRRRR or flip especially in this market. Any house over 50yrs old is going to have a lot of plumbing & electrical issues. I also think it’s very hard to find good workers.

Eddie Gonnella · Answer

Hi @Matt Carozza! One thing I would recommend is digging into some of the BRRRR resources that are available here on BP. The most recent 2 podcast episodes are great and all about BRRRR. There's also a few BRRRR specific episodes a little further back on the BP Real Estate Podcast. Here's a good blog post too: https://www.biggerpockets.com/blog/brrrr-strategy-real-estate-investing

As for this particular deal, it is definitely more complex due to your family relationships, but I completed a fairly similar transaction last year as my first deal and it did help me to get started. Mine was not as extensive as an 1800s Church Hill revival though.

My recommendation would be to get on the same page with your family member and find someone else to get involved here that has more experience and cash to complete the deal. If you/they really do have that much equity in the property, you should be able to find someone who is experienced and would be willing to partner with you on this. You and your family member can make some money, see how this all works and not really have to do much at all besides watch. That's what I would try to find, unless you have a lot of cash sitting around and really want to get a master class in rehab.

Eddie

Matt Carozza · Answer

I think you're right about taking on less risk starting out, given the current situation, and I do think that a house hack would be a good way to start. As for networking, I couldn't agree more. One of my goals for this weekend is to find all the REI meetups around town so I can start networking and meeting people. I'm sure it's more difficult to do right now, but hopefully some meetups with start happening again soon. I look forward to meeting you as well, thanks again!

Stephen Glover · Answer

@Matt Carozza It may have been mentioned above, but it is highly doubtful that taking 80% from $400K or $500K and being left with a cash flowing rental is possible in Richmond. I've not seen much over $200K with 20% equity or less that will cashflow. (Yes, there are some, but not many)

I'm hoping that if they've been there for over 15 years then they may have great equity in the home, or maybe it's paid off by now. If you fix it up (let's say for $125K) and then the value is truly $400K, then only pull the $125K back out (because the home is paid off, or close to being paid off), and have a mortgage on that, then a BRRRR is definitely possible. You could pull ~$200K out, $125K would be recouping the money for rehab, and $75K would be money for other investments (or any variation of that concept based on the numbers).

I love BRRRRs and have 3 underway right now, have completed a handful this past year... (6-7?) but this really seems like it might be best for a flip unless you only need to pull 50% or less equity from a $400K home. Make sense?

Eddie Gonnella · Answer

@Matt Carozza To answer your specific questions:

• You should be able to pull out 75% of the equity if you own it in your personal names
• It's nearly impossible to predict rehab costs by the square foot, but based on what I'm doing in the area, if you do need a full gut like mentioned, I'd count on at least $125,000 for a house that large that is that old
• Find a mortgage calculator and plug in your numbers. Look up what the interest rates are these days or better yet talk to a banker somewhere. I look for rents to be 2x the mortgage principal + mortgage interest + insurance + taxes as a rule of thumb. This is called the 50% rule

Matt Carozza · Answer

Hey Eddie, thanks so much for the thoughtful and thorough response! That's awesome that you're from Bangor. I was up in Acadia last year, and wow, that part of the country is spectacular.

Thanks for the resources on learning more about BRRRR. I'll definitely give those a listen/read. I've been trying to wrap my head around the details from what I've learned about it already and I think I need to check out some more case studies to get a better understanding on a case-by-case level.

That's an interesting idea/strategy and definitely something worth looking into. Would you mind if I sent you a message to chat a bit more about that?

Sarah Stamper · Answer

@Matt Carozza if you can house hack that’s a great way to start! Less risky also you can get better lending if you have lived in it. The saying is true that your net worth is your network. Having a good network for deals, referrals for workers, lenders, and just learning as much as you can from others that are successful is so valuable!! You can learn a lot from others at meet ups. I was fortunate enough to know some in the biz that helped me get started. As far as what is the best route for you it’s hard to say with out knowing your situation. I would take on minimum risk when first getting started especially with market uncertainty. Good luck and I look forward to meeting you at a meet up!

Matt Carozza · Answer

Hey Sarah, thanks for the insight. It's an old row house in Church Hill from the late 1800s, so I'm sure there are a lot of issues like that. As for fixing it up with a family member, we would be investing in it together, but I do understand how things could get complicated and that's probably a good reason to not do it. As for doing a BRRRR or flip, would you suggest starting with a house hack and/or long-term buy and hold rentals and then working into BRRRRs and flips? Do you recommend talking to a lot of investors first because it's a trickier/higher risk investment, or for other reasons? Thanks for the food for thought, much appreciated!

Matt Carozza · Answer

Haha, I'm beginning to realize that it may be too big of a project for someone so new! And yeah, I think it would have to be a full gut project. I think either finding someone for him (my dad) to partner with or just going the route of selling it to a rehabber/flipper is going to be the best option. But I'm excited to network, learn more about both options, and see what ends up working best for him. And thanks so much for offering to share those templates to estimate repairs, I really appreciate that. If we decide to go that route, I will definitely reach out. Thanks, Joanne!

Options for a distressed property in a great location?

Options for a distressed property in a great location?

Most Popular Reply

17 Replies