Is it cheaper to start with a gutted house? (Baltimore)

8 Replies

Hey everybody, I'm fairly new to BP but have really appreciated all of the helpful feedback from everyone on the forums as I get closer to pulling the trigger on my first REI. My partner and I are looking at purchasing a rowhome in Baltimore close to Johns Hopkins and a major hospital (Charles Village neighborhood), rehabbing it and holding as a rental. Right now the house is a 3 bed/1.5 bath but if we can create a 4th bedroom in the basement and turn the half bath into a full bath I think we could rent the house out to students for at least $2,000 a month and have a nice cash flowing property. Even if we have to keep the existing floor plan I think we could still charge $1400-1600 in rent for the area based on comps, which would still make this a profitable deal.

Here is the unique aspect to this deal that I could use some help with. The house has already been completely gutted and framed and has HVAC ductwork, plumbing and subfloors already installed (it's essentially a shell waiting to be finished). The purchase price is $75K and comparable homes on the block are valued around 150-180K with a newly renovated house across the street listed for $172K.

The plan is to also use a personal loan from family to secure a purchase and reno loan from a hard money lender, then refinance our invested capital back out once the reno is complete and use the rental income to pay off the personal loan with some interest. 

Here is my specific question regarding this deal:

1. This would be our first adventure into house flipping and we like the specific details of the neighborhood and it's potential but are unsure if the house already being gutted is a benefit or not. Is it generally cheaper to start with an already gutted home and install all of the drywall, flooring, bathrooms, kitchen, etc? Or would be be better off going with a finished home that needs to have floors replaced, kitchen gutted, maybe a wall removed, etc.? We originally liked the blank slate idea of the house but I'm wondering if the material cost for bringing in drywall, ceiling, floor, etc. for the entire house might end up being higher than the alternative option.


I would also appreciate any feedback on the BRRR (is that the right amount of R's) strategy we are looking to employ for this venture. Thanks for all of the helpful insights so far, you guys are awesome!

Matt

Might be a great deal, but might not be. Consider these:

Knowing why it’s an abandoned project is a factor.

What are the permit requirements, if any

What quality level of finish do you need to hit in order to make it match the demographics of the neighborhood

These will all ply a role in determining if you’ve got a winner or a loser.

@Matt Radhe   If you were going to do a full gut rehab anyway then generally yes, having it gutted saves time and money.  However you need to consider; is the framing and HVAC done properly? Has it been framed to a floor plan that makes sense?

Keep in mind most Baltimore housing stock is very old. If you buy a fixer upper that looks pretty good but has old wiring, plumbing and heating you may be replacing everything anyway. 

That hard money lender will insist on being in first place and my even require there are no other loans recorded against the property. When refinancing the  new lender will have the same requirement. This means while you can certainly borrow money from the family you probably won't be able to use the property as collateral. 

Keep in mind the BRRRR strategy only works when you are adding significant value to the property through renovations so that you can refinance yourself out at 75-80%

If you were planning to gut it anyway then I think buying a "pre-habbed" house like this one can be good.  In addition to the cost savings in demo, you also have the advantage of being able to see behind the walls to know what the electrical/plumbing is like, if there is moister or cracks in the walls/foundations, and if there is an wood destroying insect damage.  On the flip side you need to make sure that the work that has been done was done properly and that it was permitted - you don't want to have to go back and redo it.  Good luck!

It only depends on the numbers. based on costs you should be able to calculate your profits going in regardless of the property condition.

assuming the purchase price includes the discount for the cost of drywall you should easily determine the exit numbers.

You make your profit when you buy and realise the profit when you sell. 

Persnally I prefer working with new drywall but the extent of demolition will depend on many factors including time line on the project.

Hi Matt,

If I am not mistaking, I know the house you are talking about. It is further than guilford and that area gets tricky, for both rental and sales.

I know houses sit on the market for a long time around there.

If I am right, I would pay less than 75k.

If I am wrong on the house than never mind :))!

Thanks @Ozzy Sirimsi , I appreciate the feedback! I agree the area isn't exactly the ideal spot that we're looking for in terms of prime rental opportunities, although I did like that it is very close to the more desirable neighborhoods. I also agree that the asking price of 75k is too high, on that same street there is a newly rehabbed house that was purchased for 50k and listed around 140k now...if we were to go on this house we would have to get it for around that price I think for it to be worth it. I think we are going to continue looking for a more optimal deal but will keep our feelers out in the blocks a little closer to Hopkins. Thanks again!

Matt

First question to research..... why is the rehab stopped at this point? i.e why did the previous owner start it and then decide to bail?

Personally I would rather buy a "partially done" house where the drywall wasn't done yet etc, so I could see what evil lurks behind it vs one that is at that point where a lot of garbage could be hidden from view.

Just keep in mind that an appraiser typically can't count basement sqf and thus spending a lot of money downstairs might up your incoming rent, but might not add value if you refi. 

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