Good morning! I recently completed my first major REI (buy and hold) rehab and thought I would share my experience; mishaps, disasters and all, with everyone.
My husband and I bought a 90 year old estate sale house in a middle-class suburb in NJ (an A neighborhood). It's a two-family (2/1 and 2/1.5) that we bought for $315 with a 5% down FHA 5/1 ARM at 3.75% in August. The appraisal for the house came in at $335 when we bought it, and we conducted what we thought, was an extensive inspection (including a separate termite inspection). We obtained a few construction bids beforehand and were estimating a max construction budget of $60k. We had about $20k in cash, a $25k personal bank loan at 6.25% and planned to put anything additional on 0% interest for 12 months credit cards that we would pay back with the rental income after construction was completed. We had a construction timeline of 6-8 weeks.
The project scope included:
Upstairs, a gut remodel of the kitchen, including adding a dishwasher, and opening up a wall to make an open living room/kitchen, updating the bathroom, adding a washer/dryer hook-up, and new paint/carpet.
Downstairs: gutting and opening up the kitchen, adding a dishwasher, gutting and enlarging the main bathroom and gutting the 1/2 bath, enlarging the master bedroom closet, adding laminate floors and new paint. We planned to live in the upstairs unit while we remodeled and then move downstairs to reside in the larger unit for 3-5 years while we rent the upstairs unit.
Once we started construction, we ran into several major problems including a steam pipe running through a kitchen wall that we were planning to open up, a huge leak inside a couple of walls that required the replacing of a whole exterior wall, damaged subfloors, major termite damage that resulted in a replacement of the sill plate in the master bedroom, needing to upgrade full electrical service (and split it into two separate panels) and a corroded water line that required emergency replacement all the way to the street in the middle of winter during record setting cold temps and a snow storm. We also had issues with our general contractor who's subs weren't fully licensed and were careless, which resulted in several delays and several failed inspections. Construction started in early September with an estimated completion of mid to late November. Finished construction (mostly) in mid-February, 2.5 months late, and more than $40k over budget.
Here are some before pictures:
And here are some "afters":
The main problem with the delays is that it has been really hard to get a tenant for the upstairs apartment this time of year, hopefully that will be resolved in the next few weeks though. We hope to be able to get about $1500/m for the rental and we anticipate that when we move out in a few years, we will be able to get at least $2200/m for the downstairs unit. We also had our realtor run a CMA and she estimates that our house is currently worth approximately $415k, and will likely increase at least $10k in the next 6 months. This information was music to our ears because it means that despite all the stress and financial overages, we are not underwater on our house...and to me that is success!
Here are our current monthly numbers:
Current Mortgage with PMI, taxes, and insurance: $2485
Upstairs rental: $1500, so we are paying $985 "rent"
Conservative projected numbers within 5 years:
Mortgage (after refinancing out of ARM and PMI: approximately $2200
Monthly profit: $1700-1750
Despite all the challenges, stress, and struggles I feel like this project was well worth it, we learned SO much, and for the most part, really enjoyed the experience. The next year or so will be spent paying off our bills and rebuilding some cash, but then I can't wait to start looking for our next project! I would love any feedback you may have, and to hear about your own struggles getting started with REI. Thanks for reading!
Congrats! Love ur kitchen. and bath tiles.
Looks 90years younger now
Nice rehab work.. When you say A-class suburb, do you mean Summit/Chatham/Millburn?
Congrats thanks for sharing. The northeast is very rough for us. Just starting out myself. Thanks for the tips
Thanks guys! @Alex W. - We are based in Hawthorne. I was using the "class" system based on quality of tenets/safety of area/stability of area vs. more of a classification of the income/town itself...but I guess I could have said more of a A- minus compared to towns like summit :)
Congrats on the Re-Hab.... Thank you for sharing the info #'s also... I see that construction had many overruns to include delays and expenses maybe beyond your control. Do you mind sharing what you would do differently today now that you are more experienced?
When you say you are 40k over budget is that over the 60k you initially estimated (Making the reno a total of 100k)? Have you rented the unit yet? Did you live in the property during Reno's? Just trying to understand your "profit" #.
Hi again @Wally Smythe, thanks for following my posts!
What I would do differently: Make sure to explore the crawl space! Depending on the type of property we are looking at, I think we would also look into getting a 1 year home warranty from the owner. I believe the owners knew about many of these issues, but chose not to disclose them as it was an estate sale and was being sold "as-is". I think now, knowing the market, we still would have bought this house, but we maybe would have pushed to close sooner (start to finish the process was almost 5 months) or put penalties into the contract for delays. We have also learned about the construction process and what exactly to put in our proposals and when to use an architect
Yes - a total of $100k reno. We have a couple of people interested in the apartment now and plan to rent it for 4/1 for $1475. We did live in the property during the whole reno, at times we were limited to one room and there were several times when we didn't have electricity or plumbing and have to improvise or stay with friends. Luckily we don't have kids at this point, I'm not sure we could have lived in the house with kids. However, living in the house allowed us to make a $500/m profit on our condo, which definitely helped! Once we refinance this summer, we expect our mortgage/property tax/insurance to drop from $2485 to at least $2285, which means we'll be living in a beautiful home for $810! Add in the $500/m from the condo, we're looking at $310/m. This will allow us to pay off our bills and start saving for the next project!
Thanks for sharing.Love the kitchen too..lessons were learnt, better deals are in the pipeline
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