Small reno that ended up being a much bigger reno

10 Replies

I wanted to post this Success story from a property we bought and then sold last year. I bought it as I was getting a discount of 50K from retail and figured at worst, we could flip it quickly without a realtor and make about 45K after closing costs (realty transfer fees from state and attorney fees mostly).

How we found it. Our super also managed this and the owner lived out of state and his dad maintained it but was tiring of it. He did not raise rents as needed. Total was $3600 a month ($900 a month as they weren't in great condition and small) but knew we could easily get $4,000 a month with maybe 12k in basic/needed updates (cosmetic). Took almost 7 months to negotiate a sale.  We got the 4-family for 450K, including closing costs (Jersey City, which was and is a hot market).  

After reviewing the property location and talking to neighbors, we did more analysis on rents. We found that even though each apartment was tiny (500 sq. feet), single people were looking for clean/renovated apartments and were willing to pay $1400 a month if it was on a quiet block (this was a quiet block and there was a school nearby but size wasn't proper for most families). Based on our thinking ,we were thinking due to the size,etc. we would only get $1,200 with more renovations but more research with people on the block showed we could get significantly more.

We decided on a 95K budget (but overshot it to 110K)  and did the following

1. Updated all kitchens with new cabinets/granite

2. Updated all bathrooms  

3. Upgraded floors ( went with a clean luxury vinyl for $2.25 /sq. foot)

4. Sand/Fix all walls , Replaced all doors, New Radiator covers

5. Update all common areas (they looked old and worn)

6. Stainless steel appliances

7. Misc. Leaks, fixed bad piping, some electrical issues, etc. (people at $1,400 won't put up with some of these longer term and we were possibly considering holding this long-term if we didn't get our price).

All in cost was 450+110=560K. At this price and with taxes management, etc. we were at a true 9 cap, which is excellent for Jersey City and if we refinanced, this would've been significantly higher.

 Reno was 2 months but 1 month was waiting on permits so took 3 months. We showed units when they were a week from being done and had all 4 rented 2 weeks after we were done.  We got an offer for 750K and immediately took it because at this price, the cap rate was 6.5 at this rate and we had other properties we could get 8-9 caps on after renovation. Also, since the place was small, we just didn't think we could do much better long-term in terms of appreciation. 

Finalized sale about six months after purchase, Our gross profit was 190K in 6 months. Due to taxes, we did a 1031.

@David Wientraub - This was in the Heights, closer to N. Bergen

@Amit Patel how did the 1031 exchange go? I don’t know why but I was under the impression that you needed to keep the property for 1 year before you could do the 1031 exchange.

@Shiloh Lundahl

There is no rule on how long you have to hold. If you can prove you were doing it as an investment, you are fine. We purposely did changes that went beyond cosmetic that a quick fix/flip person wouldn't do. We have also held all our other properties (Our philosophy is buy/hold) so I was very comfortable with our track record of acquisitions. 

The 1031 folks I worked with were amazing and on top of their game so paperwork wise we had no issues and we paid about $1200 or 1,500 or so total I think in total fees. However, the 1031 was tough to execute fully due to timing! Luckily, we had a 4-unit+1Comm property for 475K (vacant fixer upper)  that we had already scoped out but then we needed more to get to the 720K or so that we netted from 750K gross so we added a 3-family family on top of that for 310K.  Due to complications the 4+1 Property took 5 months almost to close (was owned by bickering partners). The 310K house was a quicker closing.

The 4-units was rehabbed and rented while we are turning commercial into 2 more units (awaiting approval). If this one 4+1 comm. works out like we planned, it will likely end up being our best investment as we should get all our money invested back and the property will provide a free 35k cash stream for life. Can provide more details on how the numbers worked out if any is interested.

Way to go @Amit Patel !  Your due diligence and determination clearly paid off.  Congrats!

@Amit Patel

Great job! $190K in profit after six months would be difficult to turn down. 

Thank you all for the Kind words.  I do this part-time and spend an hour a week (sometimes two) looking for these types of deals and have been lucky to find great deals. It does takes 6-8 months to find an amazing deal and seems to be getting harder but totally worth it. I am hoping to learn how to get better deals through direct mail and hoping to get more deals that way.

@Amit Patel

Thanks for a well-written post with solid background and numbers.

I do believe you can use DM effectively to find more deals since it's harder and harder to find great deals. In your example, you created a great deal when others didn't see it by doing alot of research and undergoing a large conversion.

If you want a game plan for direct mail, checklist of things to prepare, or scripts on talking to distress and motivated sellers from your campaign, I'd be happy to share.

@Ray Lai

I'd love to take you up on your offer for some advice on the direct mail and will PM you - It's much appreciated.

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