New Investor - If you were me, what would you do?

Question

Hi all, I need some advice on a deal. I found a 3 bed / 3 bath house listed for 70K in Fort Worth Tx, 2,327 sqft. All the surrounding houses are listed for around 240K.

The average rent for 3 bedrooms in the area is $1,500

Mortgage$273/Mo for 30 yrs fixed

Taxes $136

Insurance: 25

CASHFLOW: $1,066

According to the listing it should take about 30K or rehab, so to be safe I would make that 45K. ( I would of course get a few bids from contractors, but I saw the listing an hour ago so bare with me)

I can afford the down payment of 14K for 20% down. But that's all of my money.

I am expecting a minimum bonus at work next month of 15K - could be closer to 22K not sure yet.

Would this be worth getting under contract and getting some contractors to make estimates? I believe I could pull out if needed in 30 days, correct?

I am nervous about how I would afford the rehab. I could of course put my 15K bonus towards it next month but that would require me to come up with 30K line of credit somewhere and not sure where, and the uncertainty makes me nervous. Credit card? bank loan? I have a very strong w2 and good credit.

What would you do? Am I jumping the gun? Initially I was going to save for money this next year so I could make a cash offer on something and brrrr but this deal seems too good to wait.

Thanks in advance :)

Katie

Mitch Messer · Answer

Hi @Kathleen McCabe and welcome to BiggerPockets!

I applaud you actively looking for deals, but let's slooow down and revisit that cash flow calculation!

You're missing a few major expenses, namely Management, Maintenance and Vacancy. Also, your mortgage payment estimate assumes a 4% interest rate, but that's likely only for a loan that requires you occupy the property. These days, for an investor loan you'll pay closer to 5-8% (or more, depending on your credit).

So, with Management at 10% of rent ($150/mo) , Vacancy at 1 month out of 12 ($125/mo), Maintenance at half a month for the year ($62.5/mo), and a 5% loan with 20% down ($300/mo), your actual monthly cash flow will be more like $700.

Pete Woelfel · Answer

Agree with @Mitch Messer on that calculation but also agree that $700 is still very good cashflow on a SFH.

My 2 cents would be:

1) If you can get "cheap" money from family or friends and you're comfortable with that you could go that route for the rehab.  Either give them an equity stake or plan to pay their principal back with cash flow or a refi (I prefer not to give up the equity but that's just me)

or

2) Partner up with another local investor that you can learn from.  Find someone who already owns multiple properties and runs them well and knows the areas.  You'll probably pay more, but that can be worth it if it helps you take the deal down quickly and you have a connection that can help educate you.

Costin I. · Answer

@Kathleen McCabe - First, get it under contract, with as little option money possible (no more than $100) for a long as possible (10+ days).

This deal sounds too good to be true - 2,300+sqft for 70K surrounded by 240K houses? No way (unless the house has SERIOUS problems, requiring a lot more than 30K renovations). But get it under contract, and figure out what to do with it later.

As for money, with a deal like this you'll have no problem getting it. If the deal is real.

Kathleen McCabe · Answer

@Daniel Cardona - It is not an auction home. It is for sale by owner. The description says "mainly" cosmetic repairs...

yea, I assume this deal will probably go to a cash buyer... but I'm still going to have the conversation for practice / education at the very least.

There is a portion of the description that says " Outside of the 70K, the right buyer can simply take over the payments on the rest of the house while the rehab is being done. Monthly payments are 1,381" PITI. I would have to dig into that some more but perhaps that is why the price is so cheap?

Daniel Cardona · Answer

Sounds too good to be true in my opinion.  Is it an auction home?  Foundation issues?  I'm wondering if it would probably need more repairs than $45k given the spread between purchase price and ARV.

On another note, there are lots of investors out there with cash.  If the deal is as good as mentioned, I'm sure there will be cash buyers willing to pay that or more with a quick close.

Pete Woelfel · Answer

I think if you can bring them a good deal like that, you'll get to know them pretty quick!  Not sure about Dallas but in Milwaukee there are some quality meet ups.  Might be a good place to start!

Michael Noto · Answer

@Kathleen McCabe Put aside the specific repairs it may or may not need, are you in a position capital wise to take on a project like this? From what you described it doesn't sound like you are.

Rehabbing properties via the BRRRR strategy can be great, but is not something I would recommend to someone is undercapitalized. Especially since it sounds like you don't have any experience estimating rehab costs.

Dennis M. · Answer

The description says cosmetic only lol

Have you took a team of contractors through it or just going by the sellers description . This is a pipe dream

Kathleen McCabe · Answer

@Pete Woelfel Thank you for the solid advice. I will ask around locally and see if I can pull some financing together. I know very few people in the industry at this point but at least this will give me a good reason to start a conversation.

Thanks,

Katie

Kathleen McCabe · Answer

@Mitch Messer Thank you for the reality check on numbers :) 700 a month still seems like solid cashflow in my opinion. How would you recommend I finance the rehab in my situation? Partner up or get a loan? If so which type of loan should I look at?

and you're right I do need to slowwww down :)

New Investor - If you were me, what would you do?

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