Am I making a horrible decision or passing on a great opportunity

28 Replies

Setting the stage:

My wife and I have been looking for quite sometime for a good opportunity in our area, southern California, beach community. A realtor I've been in communication with called me up and said I have something you might be interested in. It was a pocket listing from her office that was going to go on the MLS in a day or two. The home is a 1920's home within a 4 min bike ride to the beach but needs a total remodel. The roof needs to be replaced with rafter repairs, need new electrical panel and rewire, a wall needs to be removed, needs a new kitchen and bathroom. We made an offer to try and avoid letting it go on the MLS and getting into a bidding war and they accepted. After some negotiation they have agreed to replace the roof (only a 25 year) and declined to credit us a 9k for the electrical work.

The numbers:

Purchase price - 639,000

Repairs - 120,000

ARV - 850,000

The Problem:

We are going to be using most our savings for the 20% down payment and will have to borrow about 75,000 from family for the repairs. After paying the mortgage and the repair loan, we will cash flow from our income 4k. We plan on having a baby next year and if my wife stops working we will loose that 4k for a few months making things very tight. Flash forward 5 years, she will be back at work, loan paid we will be living very comfortably 7k cash positive a month.

Is this deal not worth being tight for a year or so?  Am I about to spread ourselves too thin? Is there a better financial strategy I'm not thinking of? Is this just bad all around?  

My wife and I have talked endlessly about this and have flip flopping on what we should do. I was hoping to get an outsiders honest opinion.  Thank you so much in advance. 

I think that you have to decide what you and where are you going? If this house is something you want for your future then I would say go forward and buy it.  If this is just an investment piece then I would say watch all the options.  

As for they are not giving you anything off the electric I think that they have discounted the home with the thought in mind of what it is worth before the repairs. 

My next question is did you have it appraised?   Make sure it is worth what you think it is.  Then add on the fixes that you are needing to do.  


One last thought I have is if your wife is having a baby next year is that gonna be your only child or are you gonna be down income another time or more in the future?  Also then is your job rock solid? If you were the only income and you loose your position can you afford or do you have savings somewhere?

Good Luck if you have any other questions just ask.

The margins are a bit slim IMO to throw all your savings and family money at this thing.  Especially if it is your first and being somewhere closer to the top of a market than the middle. 

@Alejandro Arciniega so it sounds like this is a SFR and not a multi unit property correct? After everything is said and done you'll cash flow on a yearly basis $4K so approximately $350 a month.

So the approximate rent on the property will be $4,300 a month correct?

If there is more room for appreciation over the next two to three years and you're cash flowing then the deal is not bad, however, if you there is not going to be appreciation then be very mindful.

Originally posted by @Michael T. :

@Alejandro Arciniega so it sounds like this is a SFR and not a multi unit property correct? After everything is said and done you'll cash flow on a yearly basis $4K so approximately $350 a month.

So the approximate rent on the property will be $4,300 a month correct?

If there is more room for appreciation over the next two to three years and you're cash flowing then the deal is not bad, however, if you there is not going to be appreciation then be very mindful.

Yes, this is a SFR. The cash flow I'm referring to would be income from our day jobs. The plan is to live in the home for the foreseeable future. There is a small bungalow in the back that could eventually be turned into an airbnb and would easily be rented out being so close to the beach.

You said you have been looking for a while and looking for a beach community. In this scenario, you will be getting the house for $759k after renovation. Once done it will be exactly what you have been looking for and with the exact finishes, you want. This will also be your owner-occupied home. 

You need to ask yourself will you be able to find this house in this market for $759k? You also know its a competitive market bidding against you. In this case, you got lucky and got your offer accepted. Will you have this opportunity again? I think what you have is very scarce and hard to duplicate. You also have upside on your ARV so all the hard work will be worth something.

@Alejandro Arciniega since this is for your personal residence here in Southern California it will definitely be more of a personal preference.

Remember living in the Los Angeles market isn't cheap but there are definite benefits such as; debt pay down, appreciation and truly enjoying where you live.

While this is a personal residence purchase and not an investment purchase it is still better than renting!  Ultimately, it becomes a personal preference of what you want to do.  I always prefer to own versus rent.

A beach house with a bungalow in the back, in a tight market, in a highly desirable area... Don't let fear of never having done this before scare you. I think this will be a great home and investment long term. 2 years of budgeting and living on a thin margin might not sound so bad when you consider a long enough timeline. You'll basically have a new home (that sounds like it's not been on the market in decades) in a hot area with income producing potential through a short term rental in the back yard. Get inspections get realistic bids to do the work, hire the right people to preform the work, and proceed. 

You see the opportunity and the work ahead and it's scary, but these are usually good deals. You know what this is. Just look long term and get the right bids and team.

My two cents: you should pass. This is way too much work, especially in your financial situation and with your lack of experience.

My first gut rehab cost almost twice what I expected it to cost. Luckily, I had reserves and it originally penciled as having a high profit margin. I didn't lose money, but I cut it close. And it took 8 months...

In your situation, you should look for a light fixer-upper so you can get comfortable with the pricing and the process. You can then rent it out, refinance out your investors, and move on to the next one--with a lot less risk involved.

It sounds like the you are afraid of how depleted your reserves will be. In which case why deplete them so much in the first place? Instead of a 20% downpayment why not try 5% from Freddie Mac's Home Possible program? This alone would save you nearly 100k worth of down payment money. It comes with PMI, but unlike an FHA loan, the PMI can fall off once requirements are met.

Originally posted by @Alejandro Arciniega :

@Ali Boone No, we've never done anything like this before. I consider myself handy but this is a complete remodel. 

Seems like you're biting off a pretty big chunk right out of the gate. You've never flipped/rehabbed, you're investing everything you have as well as family money, and you're on a time crunch. Not to say it can't be done by any means, but that seems like a lot of notable risk factors.

Originally posted by @Alejandro Arciniega :

Setting the stage:

My wife and I have been looking for quite sometime for a good opportunity in our area, southern California, beach community. A realtor I've been in communication with called me up and said I have something you might be interested in. It was a pocket listing from her office that was going to go on the MLS in a day or two. The home is a 1920's home within a 4 min bike ride to the beach but needs a total remodel. The roof needs to be replaced with rafter repairs, need new electrical panel and rewire, a wall needs to be removed, needs a new kitchen and bathroom. We made an offer to try and avoid letting it go on the MLS and getting into a bidding war and they accepted. After some negotiation they have agreed to replace the roof (only a 25 year) and declined to credit us a 9k for the electrical work.

The numbers:

Purchase price - 639,000

Repairs - 120,000

ARV - 850,000

The Problem:

We are going to be using most our savings for the 20% down payment and will have to borrow about 75,000 from family for the repairs. After paying the mortgage and the repair loan, we will cash flow from our income 4k. We plan on having a baby next year and if my wife stops working we will loose that 4k for a few months making things very tight. Flash forward 5 years, she will be back at work, loan paid we will be living very comfortably 7k cash positive a month.

Is this deal not worth being tight for a year or so?  Am I about to spread ourselves too thin? Is there a better financial strategy I'm not thinking of? Is this just bad all around?  

My wife and I have talked endlessly about this and have flip flopping on what we should do. I was hoping to get an outsiders honest opinion.  Thank you so much in advance. 

 Nope. You are asking way too much of your wife and assuming too much of the future.

@Alejandro Arciniega I would do it, but get an FHA loan (3.5% down payment for owner occupied property) and then a 203(k) loan for the rehab. If you get that type of financing, you'll be able to breathe easier.

I did a similar deal in Miami with a 1920’s fixer upper with a guest house that is my personal residence. It’s great that you have that bungalow option. What I would do is first focus on fixing up the bungalow, then move in there with your wife and baby so baby is in a safe, baby-proofable place and not exposed to all the construction debris and noise. Then you can take your time with the rehab of the main house, as finances allow.

I did this with my house and 3 years later after putting in $200,000 in rehab, took out a $650,000 HELOC on top of my mortgage. I am using this for my war chest for investing in more real estate.

I’m also from SoCal so I know that getting a house by the beach for less than a $1M is a super sweet deal.

I totally think this deal is doable and that at the end of it, you'll be in a great position. But you need to get that down payment lower so only do it if you can get that FHA loan. If you can get the 203(k) loan, even better.

Originally posted by @Allen C Herring :

@Alejandro Arciniega hello Alejandro, see if you can get a 203K loan which allows you to include your repairs in your mortgage loan. This will help you get around raising that 75,000 dollars.

 Currently using a 203k loan - Not a bad option but will reduce your options with contractors which can make doing a complete rehab tough. I am doing a complete gut (down to the studs with drawings) and not being able to pick any contractor can limit your options significantly in your market.

@Cody Z. I see Cody. I see how that can be an issue. That is something else to think about as you stated. Do you think it would have been better to just raise the funds from limited partners?

i second comments about putting less down. after completing repairs, refi the house @80% and get some cash back. do make sure your repair estimate is on point. like many others have mentioned, things add up (especially the "small" ones) and you can blow past your estimate in no time.