How much should we pay for this house?

Question

Hey Y'all! (Think of an Irishman with a bad Southern accent and smile :)

We have a deal rolling on a property in the 'hood. Close to the Atlanta GA dome, it's on the "wrong" side of the I20 (South), but west of the I85 in a neighborhood that has some rehabs going on, but days on market are running to months and Sellers have to hold out for buyers to get their prices. So it's a fairly tough market.

It's c.1,100 s.f. 3 Bedroom/1 Bathroom on a large lot, has a full basement and converted attic. Also has a downstairs workshop converted 1 car garage to the side. The 3rd Bedroom is actually a den/office.

Plumbing, HVAC and electrical have already been stripped out, the locals are helpful like that ;). Kitchen and bathroom refit also required. Roof seems to be in good shape with no dampness in the house. Property could be made habitable for around $12k (will rent for about $700 per month) or a full rehab at $25k to sell at $79k, probably to a FHA buyer. This area will most likely come back up over the next few years and has already been about 50% rehabbed. We comped just two other fixer uppers available in the area on offer at $45k Some rehabs a few blocks south are currently offered at $160k plus.

So what you guys think? What would you pay for this opportunity? Would you rent it for a few years and wait for the market to rise or would you sell it on immediately?

Thanks so much in advance for your kind consideration....

Rick Baggenstoss · Answer

@David  T. I invest in the Historic West End, zip 30310, south of Abernathy and north of White so not too far from your prospective house.

In the 'hood, I differentiate the potential of a house and area based upon the elementary school boundaries (among other things).  The difference between a "1" rated school and a "3" can be significant if you're holding.

The area you're describing isn't changing very quickly, IMO.  If I bought the house, I'd flip it. It's too much cash out of pocket to do a rehab and hold.  I suspect the elementary school is a "1" or "2" so I wouldn't want to bet on appreciation.

You're also pretty close to Atlanta's only war zone (English Ave area) where houses are $10k and crime is a serious issue.  http://en.wikipedia.org/wiki/English_Avenue_and_Vine_City

Rick

Account Closed · Answer

A good website I use to find more information on specific zip codes is

http://www.city-data.com/

It helps a lot since I don't live in state!

With an ARV of 79k, that seems like a pretty thin spread for 25k rehab and considering your possibly large holding costs(like you said, properties have been sitting on the market for a long time which drive up the holding costs) so I don't think it's worth it to go for flips in that specific market.

Personally, I'd like monthly rent to be at least 1.5% of purchase price so if it was me in your situation, assuming your rehab cost for rentals is on target and you can get it rented for $700, I'd want it at $30k or less, considering that the property is probably older and will need more maintenance. But that's just me.

Account Closed · Answer

David, do you have any comps on recently sold properties of similar age, size, and composition? It's hard to just come up with a number if we don't know the market(I personally only invest in Gwinnett/Cobb county) and it's not the best idea to decide the value just based on potential rent.

What are the home ownership rates there? If there's already a high percentage of rentals, I wouldn't go for the area because there'll be so much other competition.

David T. · Answer

Thanks for the info. I'm paying an average of $1k per $100k for vacant rehabs. They're just covering purchase and cost of rehab as we pay it. Won't give us ARV insurance from day one, lol.

Heather W. · Answer

@David  T.

David,

The insurance is quote is for $534/yr through American Modern but is only for $60K replacement value right now.  When I get the inspection I'll try to convince them to increase coverage or decrease premium based on how much updating has been done.  They limit replacement value to 20% of purchase price on older homes, short sales, etc.

I have another policy with them on a house I bought for $40K.  It has $60K replacement, $300K liability, 3 months of replacement rent and some vandalism coverage for $519/yr ($1000 deductible).

David T. · Answer

@Rachel Leonard You will almost always pay a higher price for the northern side of ATL. It's much easier to exit and you have better chance of appreciation and stability. Anybody netting 10 points or better on buy and hold in good areas is doing well, IMO. However, there are some bad locations northside too, so play it tight and good luck to you!

Heather W. · Answer

@Rachel  Leonard

I've seen the house myself, but the inspection isn't until Friday. So it may turn out not be such a deal after all.

Rachel Leonard · Answer

@David  T. @Heather W.

Hi,

A colleague has sent me a deal in 30314 (north of I20) which is a newer house being rented out to section 8 for $1055 per month. Asking $59,000 which includes a block of land next door. I'm not familiar with the area and it seems like, Heather, you have a better deal at $45k with potential rent of $1100.

David T. · Answer

Impressive looking numbers. Where are you getting your insurance? It's good value. As a buy and hold with a good tenant, this is great stuff and you're making me eat my words. Fair play to you. I really hope this deal works out for you and you can maintain this standard of return.

Heather W. · Answer

@David  T.

David,

I'm not coy, but I do preface this comment with the fact that I'm a new buy-and-hold investor and not a flipper.  I'm under contract for $45K on a 5/3 house.  I only have $5K budgeted for improvements because it seems to be in pretty good shape, but my inspection isn't until Friday. Rentometer says average rent is $1102 for a 5 bedroom and the median is $1048. In fact, I'd be curious to know what you and @Rick Baggenstoss think.  Attached are my starting numbers.

Thoughts?

How much should we pay for this house?

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