First Buy, Rehab Rent - Not Renting - Need Advice

12 Replies

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

@Jeff V

If you can add a bedroom and

do a "bond for deed" in LA,  getting 10% down to business owner that can't get a mortgage

Shows nicely. You're competing against other landlords in the area. I suggest that your tour some nearby rentals and see how you stack up.

I would need to know your market to give you good guidance.

Best to you.

Originally posted by @Jeff V. :

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

 Your original estimates were that it would rent for 700-800 a month, you tried renting it for 850, and you are wondering why it's  not filled? Your own numbers tell you why it's not rented. 

If your unit is nicer than everything else in the area,  drop the rental price to 800, if its worse than other units in the area drop it to below 700, if either of those two prices are two low,  sell and cut your losses or reahab(to a 2 bedroom)   IF the after rehab situation will change the situation.

What you need is a tenant willing to pay a decent market price who won't care about the layout of your rental.

I'm not a huge fan of Section 8, but why don't you make an appointment with the local Housing Authority and ask them if they would subsidize a rental at the price you want.  If not, how much lower?  

It's hard to find section 8 landlords.  It just might be the way to go for this property.

this is a cute house. shows very nicely and you have done a great job. i'd live there.

lower the rent to get it filled. get as much feedback as you can!!! follow up with calls or have someone else call them to get more out of them.

@Jeff V. your property looks great and the price seems fine.  If you decide to move forward with the vinyl plank floor install, you should consider allowing pets.  Vinyl plank is one of the most durable floor options I've found.  I allowed large dogs in a rental once which had vinyl plank floors.  It was a great decision.  I got the renters I wanted, they got the house they wanted and no wear at all was visible after a year.  You could realize a serious competitive advantage.  A dog owner who is a good tenant will be reluctant to leave a pet-friendly home.

Best, -Robert

After again reviewing your listing, I see that you do allow pets.  Perhaps use that selling point to drive some interest.  Keep us posted-

Thanks Everyone.

@Brian Gibbons     

Good idea, sounds like a good backup exit strategy

@Al Williamson

@Michael Herr - Thanks for the Reality Check.

@Sue K. - Nice one, I didn't think of Section 8.

@George P. - Thanks for the words of encouragement.

@Robert Lockwood - Good idea, Most of the calls people were wanting to be able to bring pets.  Definitely missing out on this market.  We went with the vinyl flooring to accommodate Pet Owners.

We've lowered the price to 760 which is below the median rent in the area also below the Z Estimate on zillow and right in the middle of the range that I calculated initially 700 - 800.  

We've got a flooring contractor pulling the flooring and we'll be going with the vinyl plank flooring.

How long would you suggest waiting between price changes?  I don't want to change it to quickly and allow the marketing to work, but I don't want to waste too much time either.  Hopefully it will rent at the new price.

We will be allowing Pets, with a Pet "Fee" of course which is non refundable.

As a backup plan I'll be contacting the Section 8 housing authority to get more information on what to do to qualify the house for Section 8.  I think that will open up another pool of tenants.

Does anyone have lessons learned on screening Section 8 tenants?  

Currently we have a requirement:  Monthly Salary greater than 3x Rent Amount.  I'm thinking that will probably have to be modified.  Any thoughts on this topic?

Also regarding the empty lot - It's zoned Transitioning Business and can have Residential or Commercial uses.  Any ideas for the empty lot and best way to generate a second income?

Thanks,

Jeff

@Jeff V. For Section 8, you can require your normal criteria, except for income, as I understand it.  I believe you can only require them to make 3 times their portion of rent.  But, you can require good credit and good references and no criminal and no bankruptcy and no eviction, etc.

I just recently got my Section 8/HUD voucher. I'm in low income senior housing. They determine how much you can afford. They will allow a tenant to pay out of pocket up to a certain amount, over what they will determine they can pay - but if I remember the little seminar they gave us correctly, they will not allow this for the first year. I do know, that it's against the rules for a Section 8 recipient to pay you extra under the table, for you and for them.

You are allowed to ask market rent.  The HA may try to negotiate a lower price, so they can put someone in your unit.  It would be up to you whether or not to do that.  

The HA does not vet a recipient for criminal, credit, eviction, etc.  

Here's the HUD info page, which might as well be in Chinese for me LOL:

http://portal.hud.gov/hudportal/HUD?src=/groups/la...

Here's an easier to read website done by Austin's HA:

http://www.hacanet.org/HCV/landlordsindex.php

You could consider a mini model. We use this in the apartment industry to help people imagine living in the units. This property is so fresh and clean people may have a hard time seeing themselves there. We usually hang shower curtains, add throw rugs, hangers and gift bags with tissue paper, a plant and door mat at the front door and lots of air fresheners. It's very inexpensive and when it rents you can incorporate the mini model items into your own home. Make sure you select colorful items to give it a pop of color.

@Jeff V.

 It's been a while since I followed-up on this post.  How did the situation turn out?  I'm finishing a rehab in a similar market only a few hours away and would love to hear that it went well for you-

@Robert Lockwood

Thanks for the follow up.

We ended up re-doing the flooring with more sturdy Vinyl Plank which actually came out way better looking.  It will be our go to flooring on future rentals.

We rented the property out at $760 shortly thereafter.   In hindsight, I think it would have rented at the $800 range if I would have just held out.  Our current tenant loves the place and has expressed her intentions to stay there long term.

We have since replaced an LED light fixture due to factory defect and had a maintenance call from the new tenant.  Turns out the shower fixtures have a mixer screw that's set at the lowest setting to avoid scalding.  We had to adjust the setting and works like a charm now.  Lesson learned.

Otherwise this one is looking good.

Now to find the next deal :)

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