am I crazy for wanting to keep this property?

14 Replies

its a duplex. I own it outright. it may need about 60-70K worth of work over time.

the current value is "40K" according to realtors because its a fixer upper. but its livable! and functional. even (at times), comfortable! I live in one side and a (bad) tenant lived on the other side for about 6 years. (long story) but houses on my block are selling for about 120K right now if they're finished. my property is the biggest in my neighborhood for about 2 blocks, and I think if I can get it fixed up nicely, the equity can be at least 150. I have a nice backyard , a nice deck that wraps around, front yard, about 4000 sq ft. and its a corner house. my property looks across the street at 3 other houses and covers the same amount of space as them combined. 

I would like to rent it out. the rents would gross $2425 and pull in a profit of $1320 monthly if I can rent out both sides. am I crazy for wanting to keep this property?

@Danny Harper Jr . Welcome to BP! I don't think you are crazy at all. Get the current tenant out, do some improvements-but don't go crazy. Get the bad tenant out first. Watch some podcasts about underwriting. It is not just income minus mortgage+expenses; as many people think. All the best!

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@Danny Harper

This sounds like it can work if you’re correct about the numbers. It’s unclear how you determined your rents, renovation costs, or post renovation value. I would be as certain as you can be about those numbers before reaching a decision.

The first problem is you can’t fix it up. If it’s worth $40k now and you have to drop $70k to make it worth $135k (1/2 way between 120-145k making you the most expensive sale.) Then you lay about 10% in commissions and closing costs and you’re at $122k net. So you spent $70k if you don’t run over budget to make, you hope, $10k. 

The second problem is you say with $2400 in rent you might net $1300. So you have a $40k property that costs $13k per year to own? Yuck. 

I would personally renovate and keep it as a rental. However, you're inexperienced as a Landlord and willing to keep a bad tenant for six years, so I don't know if keeping a fully renovated home would be wise. One bad tenant can eat up a lot of income!

Here are the facts, as I see it, using the limited info you have provided:

1 - If this house is so much bigger than any other houses in at least a 2 block radius, then it will be worth 120k....just a better deal then the other 120k's in the area.

2 - You never mentioned what you paid for it.  I must assume you paid cash, and full value at that time, so my guess is $40k.  When you add the rehab cost of $70k, and then the unavoidable cost overruns, your cash in (cost) will be over $120k...probably well over that.

3 - I'm also assuming the $1320 CF does not include any mortgage.  That means your annual CF will be around $16k/yr.  This also means it will take you around 7 years to recover your cost (cash), and until you have recovered your cash, you can't start making a profit.

The reason I don't have to check the numbers is that whenever someone says "am I crazy for wanting to keep this property?" the answer is always yes. Even though it could work, you clearly have a personal and emotional attachment to the asset and this is what makes for bad decisions. Anything that is highlighted as liveable and functional needs a whole lot of work and your numbers bear that out. There aren't a ton of towns where a 40k value plus 70k rehab is going to do you solid although they do exist.

Originally posted by @Joe Villeneuve :

Here are the facts, as I see it, using the limited info you have provided:

1 - If this house is so much bigger than any other houses in at least a 2 block radius, then it will be worth 120k....just a better deal then the other 120k's in the area.

2 - You never mentioned what you paid for it.  I must assume you paid cash, and full value at that time, so my guess is $40k.  When you add the rehab cost of $70k, and then the unavoidable cost overruns, your cash in (cost) will be over $120k...probably well over that.

3 - I'm also assuming the $1320 CF does not include any mortgage.  That means your annual CF will be around $16k/yr.  This also means it will take you around 7 years to recover your cost (cash), and until you have recovered your cash, you can't start making a profit.

thank you for your responses! in response to 2. I was gifted the house.it was paid in full, so it has no current mortgage. if I sold it right now, i can turn a $40,000 profit free and clear, because 40 is a low ask for it in all honesty, so the rehab cost would be my only expense.

in response to 3, the $1320 figure includes payback on a HELOC, that I plan on using for the final project of repairing the siding. it also includes taxes for the year, CAPEX, vacancies and repairs.

id recover my 70K rehab costs back from rent in 5 years.

and then also would have about 120K in equity by then assuming the property doesn't appreciate or depreciate, thats a 50K profit within itself.

should I be trying to make more than that?

Originally posted by @Nathan G. :

I would personally renovate and keep it as a rental. However, you're inexperienced as a Landlord and willing to keep a bad tenant for six years, so I don't know if keeping a fully renovated home would be wise. One bad tenant can eat up a lot of income!

the tenant was in there for 6 years, yes. but I only owned it for 1 year. I have been trying to evict the whole time but covid restrictions have been getting in the way. I would like to do a nice renovation, in order to attract higher quality tenants.

Originally posted by @Joe Villeneuve :

Is that positive cash flow before or after you do the 70k of improvements?

before renting the place out im going to have to use my current employment to put 30K into repairs. after doing that, im going to get a 40K HELOC for the rest of the repairs. the "positive cashflow" figure I originally had, takes the 40K into consideration, but not the other repairs that im doing up front.

good point.  

Originally posted by @Danny Harper Jr :
Originally posted by @Joe Villeneuve:

Is that positive cash flow before or after you do the 70k of improvements?

before renting the place out im going to have to use my current employment to put 30K into repairs. after doing that, im going to get a 40K HELOC for the rest of the repairs. the "positive cashflow" figure I originally had, takes the 40K into consideration, but not the other repairs that im doing up front.

good point.  

 That still adds up to 70k cost to you that you have to recover first...in 7 years.

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Originally posted by @Danny Harper Jr :

its a duplex. I own it outright. it may need about 60-70K worth of work over time.

the current value is "40K" according to realtors because its a fixer upper. but its livable! and functional. even (at times), comfortable! I live in one side and a (bad) tenant lived on the other side for about 6 years. (long story) but houses on my block are selling for about 120K right now if they're finished. my property is the biggest in my neighborhood for about 2 blocks, and I think if I can get it fixed up nicely, the equity can be at least 150. I have a nice backyard , a nice deck that wraps around, front yard, about 4000 sq ft. and its a corner house. my property looks across the street at 3 other houses and covers the same amount of space as them combined. 

I would like to rent it out. the rents would gross $2425 and pull in a profit of $1320 monthly if I can rent out both sides. am I crazy for wanting to keep this property?

Properties at this price/rent point typically have expenses over 50% not including principle and interest (P&I) except if you are active in the management/maintenance.  Are you looking for more work?

If you are not active in management/maintenance your profit is aggressive especially seeing that you indicate it may be including some P&I.  Research the 50% rule and make sure you understand all expenses, especially cap expenses.

If I calculate at $150K worth (this is likely best case value), 75% LTV (3.25%, 30 year), 50% rule (which I already indicate is aggressive at your price points) I obtain these aggressive numbers:

2425 * 0.5 - 490 P&I = $722/month.  

I believe many investors would be content with that cash flow, but as I indicate I view it as aggressive.  To lower the risk, if I use expenses of 55% then I get $600/month.  I suspect some investors would be OK with this cash flow, but most of the more experienced investors would not accept this type of return (I expect over $2K/month of total return).

It is likely not a terrible first investment and it basically fell into your lap.  If you use it to gain knowledge while making ~$600/month, that could pay dividends in the long term.

Recognize that even with the use of PM and hiring our the maintenance, rentals are not passive.  ~$600/month to cover return on investment and the work associated with owning a rental is not terrible for someone starting out.

Good luck

Originally posted by @Joe Villeneuve :
Originally posted by @Danny Harper Jr:
Originally posted by @Joe Villeneuve:

Is that positive cash flow before or after you do the 70k of improvements?

before renting the place out im going to have to use my current employment to put 30K into repairs. after doing that, im going to get a 40K HELOC for the rest of the repairs. the "positive cashflow" figure I originally had, takes the 40K into consideration, but not the other repairs that im doing up front.

good point.  

 That still adds up to 70k cost to you that you have to recover first...in 7 years.

 very true and helpful , thank you!