Investment analysis

4 Replies

The snow is starting to fly here in the Northeast and I’m trapped in doors for the next 24 hours.

With the free time I thought it a good chance to get reassurance that my current deal is a good one.

I bought a 2 family about 15 years for $120k, remodeled it slowly and rented it steadily for 10 years. It’s been a cash cow and I paid the property off a few years back. I get $2400 positive cash flow per month and could easily get more.
So, Ive been a landlord for a ong time and no the ins and outs.

I took out a home equity line of credit on it and purchased a bank owned 2 family for 180k a few months back. This needed a fair amount of work but is in a good town with lots of high end properties. My house is on the bad side of town because the surrounding houses are smaller don’t go for over a million. Remodel costs will be $90k (all out of pocket) when all said and done, more than I estimated but this goes with bank owned properties.

When finished it would sell for approximately $399k (smaller lot, bad side of town, no water view).

I just rented first unit for$1500/month and expect to get same for second unit next month. I was planning on refinancing and paying the equity line off and taking back the out of pocket remodel costs ($250k note). I do however need to wait the six months to refi. I will not have any management costs (I can handle all maintenance calls). Taxes and insurance will be $350/month.

Would you have made the same deal?

The second deal you purchased looks like a great one for a flip. All-in for $270k and exit at $399k is a 67.7% all-in deal which i would consider a home run in this market.

As a buy and hold, you only get $3000 gross monthly after putting $270k into it, just slightly over a 1% rent to acqusition ratio. Since this is a higher end home, that may equate to a small cash flow, but not much once you take into consideration all the costs.
I would flip that deal and use the funds to find another flip and/or another buy and hold with better cash flow.

@Paul Tyrell I agree with @Will Bernard on this. You may have a bit more than 270k all-in (don't forget to count your out-of-pocket for debt service, taxes, insurance while you were re-habbing), but if you can sell for 399k then you'll have a very handsome profit indeed. While I don't have all your numbers, on the surface it looks like it probably would not be nearly as profitable if held as a rental property, so selling seems like your best course.

And since it could be more attractive to an owner-occupant than to an investor, you might want to consider leaving that one unit vacant for a bit while you look for a buyer.

Thank yu for both responses, but to inquire further my rehab costs included all expenses to include liabilty insurance premiums, utilities, heating costs during rehab, etc. Its not clear to me what I may be forgetting to make the correct decision between flipping and holding

Originally posted by Frank Gallinelli:
You may have a bit more than 270k all-in (don't forget to count your out-of-pocket for debt service, taxes, insurance while you were re-habbing),
Just to be clear so that everyone understands, when I say "ALL-IN" when referencing rehab flip deals, it means acquisition price plus rehab costs. The "holding costs" (taxes, insurance, utilities, maintenance, debt service, etc.) all come out of the gross spread. So if you are All-in at 70% or less of exit value, you have 30% to cover resale costs (agent fees, escrow, title, recording fees, etc), holding costs (mentioned above), acquisition costs (usually very small amount which includes your portion of purchase escrow fee, recording fees, sub escrow fee, etc.) and your net profit (before income taxes).

This is why the 70% rule (requires adjustment per market and per price points) is a simple and easy to evaluate a rehab flip deal.

Its not clear to me what I may be forgetting to make the correct decision between flipping and holding

Are you referring to all holding costs of a flip or buy and hold?

For a flip, you have property taxes, insurance, utilities, lawn care, pool care, house cleaning, HOA dues, and debt service (of course not all apply always).

For buy and hold, if you use the 50% rule, it is easy to calculate and allows for everything other than debt service. So if rent is $3000 monthly gross, then proceeds after 50% rule is $1500 which is what you have left for debt service and cash flow. The other 50% goes towards property management, repairs, damage/vandalism caused by tenants beyond security deposit, tenant placement fees, advertising, vacancy, loss to rent, legal fees, accounting fees, capital expenses (new roof, new HVAC, new electrical, new plumbing, etc), eviction costs, utilities not paid by tenants, common ground maintenance, lawn care/pool care (unless contract states tenant pays) and etc. . . .

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