First Buy, Rehab Rent - Not Renting - Need Advice
BP,
I'll give the story so far on this deal so that you know where we are and can give better advice.
Here is the rental advertisement. Let me know if you see anything that I'm missing.
Termite House
We purchased a small 2/1 with 824 sqft for 20k that needed what we thought were 20 - 30k in repairs. We decided to close in the porch to add some sq footage and convert to 3/1 as well as convert the jack and jill bathroom to give it direct access to the common area. We also opened up the kitchen to the living area to create an open floor plan.
The property is on a double corner lot and is now subdivided to be able to do something later with the empty lot.
To make a long story short, once we opened up the walls it was evident there was significant termite damage which was going to add 2 weeks and around 15k in materials and labor to the budget.
With the extensive damage we would be over the city's threshold for a minor remodel and now have to bring everything up to code. Electrical, plumbing, HVAC, Termite Plates on the piers, wired fire alarms / smoke detectors, new breaker panel, arc fault breakers for all bedrooms and common areas, ground fault breakers for all wet areas ect.
It became evident that we would not be able to finish the project with the cash on hand. We analysed the cashflow and determined that we should cashflow at around $300/mo with a 40k mortgage and we could finish the project.
The project completed and we are all in at 55k Cash and 40k mortgage with around 6k in reserves for holding and maintenance. To top things off, our final appraisal came back in at $80k... basically we lost 15k right off the top. But have no fear we can still cashflow with a 40k mortgage or can we?
About 10 days after completion all of the new laminate flooring started buckling. We have called our contractor back out 3 times now to get the issues resolved. It's pretty evident that he has no clue when it comes to flooring and can't resolve the issues. We called out a flooring specialist and he confirmed our original contractor was a moron when it comes to floating floors. He tacked down the flooring with finishing nails around the door facings and trim. The floor has been bowed up for around a month now and is permanently damaged and has to be replaced. The new contractor said the cheapest option is to put down linoleum in the hallways, kitchen and living room which will be around $900.
We are opting to do a more long term option and replace with VINYL Plank which is more resilient to weather, water and wearing... waiting on estimate.
So if all of that wasn't enough... we have had around 150 calls on the property most window shoppers. Of those that called we have had around 20 schedule an appt to see the property. Of those we have had around 10 actually show up. Of those most said the living room is kind of small and made comments about the floor buckling. Of those we had 2 like the property and are interested in renting "IF" they get a job they are waiting on or the transfer goes through to the local military base ect... So far we have not gotten ANY actual applications.
On side note our Realtor suggested we convert back to a 2 bedroom by turning a bedroom into the living room and opening up the doorway to a walkway to allow furniture to get into the room easily. YIKES... This is a last resort option but an option nonetheless.
During the advertising process we decided to let the market set the price being we were over on the rehab we didn't want to leave any money on the table. We started the advertisement off at $900/month... we quickly found out people were not getting past the price so we lowered it to $850 almost immediately. People were now getting past price and asking for more information on beds/baths sq footage ect. After a week of giving property information with no appointments to view the property we dropped the price to $825 and showings picked up a bit. With no applications and listed for about a month now we have lowered the price to $795. Note our original estimates were that it should rent for $700 - 800/ month and cashflow at $200 - $300 respectively.
Now we are at the point with $300/month cashflow and 55k in we have an CoC Return of 6.5%. As part of our business plan we do not want to keep any property in our portfolio that provides less than $200/month cashflow or less than 10% Cash on Cash.
The way I see it I have a few options:
Option 1) Continue Lowering Rent until rented. Pay down the 40k mortgage and recover some losses slowly. Lowest out of pocket cost option.
Option 2) Open doorway to second bedroom and convert it to a living area to allow larger families more spacious living area. Would address the main issue we believe its not renting.
Option 3) Add on to the living room side of the house to create larger living area. Would increase total sq footage, appraisal ect, but would be by far the most costly solution and would require re-roofing the house.
Option 4) Sale on Lease Option at slightly over appraisal price and basically break even.
Option 5) Cut losses sell property at a loss and move on with the experience gained to a better deal.
Are there any other options that I've missed?
I'm at a point where I need some advice from someone who has been there done that. How do I salvage this deal or should I cut bait and move on?
Property is in Louisiana if it helps.
Thanks,
Jeff V