First deal- buying a foreclosure with hard money a good idea?

Question

Hey all!

I'm a new member in Northwest Chicago looking to make my first investment. My partner and I found a three-flat property on the MLS located within the northwest side of Chicago that happens to be a foreclosure/cash only deal. The property is currently vacant and will likely need 3 updated bathrooms, refinished floors, new paint and new siding for the garage, however we haven't toured the property yet... I'm roughly estimating the cost to repair after purchase will be around $10,000.

Because this is a cash only deal, we will likely need to look into hard money lenders in our area that will cover the entire building cost as well as the repairs. However, based on my estimations, the cash on cash return will likely be around 14% and because it is currently bank owned, we will likely be able to get it for $50,000 less than it is valued for.

For those of you who have been in the game for a while- do you think this is a good idea for our first deal? I admittedly do not know a lot about hard money lenders yet, but I've been hearing a lot lately from my broker friends that they are pretty risky and have enormous interest rates.

Any advice is appreciated!

Mike

Michael Caruso · Answer

@Shane Ward good to hear a positive story about hard money- hopefully will get a chance to learn more about it in a future deals...

I did something that I should have done the first day when we found the property- I called the broker to get further details. The damage is actually over $150,000- lesson learned. Never run numbers based on photos alone- speak to the broker first, then find a contractor to walk it...

Eric M. · Answer

Only you know what you are looking for in a property, but my comments are...no way can you do that work for 10K. Have a contractor walk through with you. I bet it is triple.

Second, you seem to be implying you have no cash and need to borrow the whole thing. Not sure where you are going to find that deal and have you worked in the financing cost to get that 14% return, because your financing would be about that much.

Shane Ward · Answer

You should be able to get an estimate for free or at least a pretty small fee. Once you have the estimate take it to a reputable hard money lender. if its deal, they will let you know and what the costs will be. If its not a deal, they wont lend on it. I've had a good experience with hard money. It got me into the  investing  world when i didnt know exactly what i was doing.

FYI- By me (eastern Pa) a cheap bathroom reno is 5k and up. I think you underestimated the rehab based on that alone.

Michael Caruso · Answer

@Jeff Burdick Thanks for the insight... What about if we hired a contractor to come in and estimate costs for us beforehand? Would that be a safer option or would you still rule it out since its a first time investment?

Actually I should also mention that I am currently house hacking a two flat so this wouldn't "technically" be my first investment...

@Rhonda Wilson Thanks Rhonda, that is good advice... I'm sure it's different everywhere but do you have a rough idea of how much a contractor would charge to look at a building and estimate costs?

Rhonda Wilson · Answer

Your $10,000 repair estimate sounds low to me unless you are doing all of the labor yourselves. I suggest having a contractor or someone with significant rehab experience walk through with you even if it means paying for their time. It would be money well spent.

Jeff Burdick · Answer

In my opinion, no.  Unless you or someone on your team has a background in construction and really knows what they're doing and can accurately estimate costs, I think this is not a deal I would do if I were a first time investor.