Higher Purchase Price v. Higher Rehab Cost

Upstate New York, New York
Rehabbing & House Flipping
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Higher Purchase Price v. Higher Rehab Cost

Carrie Zhang
Investor · NY · Member since 2023 · 19 posts · 10 votes

Hi BP! I'm looking to do my first fix and flip deal in a new market, Upstate New York (Hudson Valley areas). I have rehab experience with SF long-term rentals in MI, but it has been a few years since I've been close to any construction. I think I have two options to get my first deal off the ground and would love your thoughts: 

1. Partner with a friend to work on larger projects with greater upside (600-700K total cost with 900K+ ARV)
- They have been doing luxury value-add STR (but never a flip) in the higher end Hudson Valley markets since the pandemic
- There's likely less competition at that price point
- It may take us longer to find the deal and obviously a larger projects also likely means longer timeline.  I'm at a greater disadvantage because my part of the funds has a higher financing cost 
 
2. Start with a smaller project on my own (300-400 total cost with 450-500 ARV)

- I would need to learn new markets and manage the risk of rehab on my own (I can borrow my friends contractor so this may not be as bad of an issue) 
- There's more competition at that price point
- I would be able to start and finish quicker (hopefully) and get actual flip experience under my belt

I'm currently casting a wide net for deals at both price points and I'm very eager to get started (I've committed to doing real estate full time). Would love to hear people's thoughts and if there are other considerations I should think about. Thanks!

P.S. Sorry about the confusing title - I tried to edit the post but couldn't change the title. I am originally also wanted to know, if total costs are the same, would people rather spend more on the purchase price or on the rehab? 

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  • Kiernan LaFaver
    Real Estate Agent · Central New York · Member since 2023 · 207 posts · 96 votes
    2y

    Personally, I think choice 2 (the smaller project) is more ideal here. NY isn’t known for being “cheap”. Labor and material costs have increased greatly since the pandemic. Longer projects…higher labor costs.  You would likely get a quicker turn around on the smaller project that appeals to a wider pool of buyers. Time is money and the less time your capital is tied up, the better. Especially in an unfamiliar market. Could you do multiple properties in the time it takes you to do the single larger project? Hope this helps! 

    0Reply
  • Hamp Lee IIIPro Member
    Real Estate Agent · San Antonio, TX · Member since 2019 · 1k+ posts · 832 votes
    2y

    Would your friend be willing to partner on a smaller project?

    Consider where you will spend a majority of your real estate investing. You can make a large sum with the first option as is, but it will be outside of what you might learn for future projects, though there will be similarities.

    If there are no changes. I’d go with option 2 as well.

    I wish you all the best.

    0Reply
  • Dan M.
    Real Estate Investor · Unadilla NY · Member since 2017 · 418 posts · 297 votes
    2y

    My two cents Id start smaller if your just trying to flip. The carrying costs on a larger property will be significant depending on where you buy. Alot of people are in the market for a 300k home , not many are looking for 900k but do your market research depending what area you choose. The hudson valley is a big area and taxes vary wildly. 

    0Reply
  • Carrie Zhang
    OP
    Investor · NY · Member since 2023 · 19 posts · 10 votes
    2y
    Quote from @Kiernan LaFaver:

    Personally, I think choice 2 (the smaller project) is more ideal here. NY isn’t known for being “cheap”. Labor and material costs have increased greatly since the pandemic. Longer projects…higher labor costs.  You would likely get a quicker turn around on the smaller project that appeals to a wider pool of buyers. Time is money and the less time your capital is tied up, the better. Especially in an unfamiliar market. Could you do multiple properties in the time it takes you to do the single larger project? Hope this helps! 


     That's what I have been thinking as well, faster turn around on my money is always preferred. Just have also been told that higher price point has less competition so curious how much that should impact my strategy. 

    0Reply
  • Carrie Zhang
    OP
    Investor · NY · Member since 2023 · 19 posts · 10 votes
    2y
    Quote from @Hamp Lee III:

    Would your friend be willing to partner on a smaller project?

    Consider where you will spend a majority of your real estate investing. You can make a large sum with the first option as is, but it will be outside of what you might learn for future projects, though there will be similarities.

    If there are no changes. I’d go with option 2 as well.

    I wish you all the best.


     My friend is only interested in doing higher-end projects... 

    Upstate New York is an interesting market because you have a lot of people who are buying as their second home(or first and have their home base in a rental in the City) and that's where most of the appreciation has come from. The smaller projects are scooped up quite quickly and have a different end user (mostly local residents) from what i can tell. So I'm wondering if it would be a good idea to enter into the higher end bigger projects as my market, or is that too much risk for my first Flip project?

    1Reply
  • Carrie Zhang
    OP
    Investor · NY · Member since 2023 · 19 posts · 10 votes
    2y
    Quote from @Dan M.:

    My two cents Id start smaller if your just trying to flip. The carrying costs on a larger property will be significant depending on where you buy. Alot of people are in the market for a 300k home , not many are looking for 900k but do your market research depending what area you choose. The hudson valley is a big area and taxes vary wildly. 


     Very good point! The carrying cost risk is definitely my main concern.

    0Reply
  • Hamp Lee IIIPro Member
    Real Estate Agent · San Antonio, TX · Member since 2019 · 1k+ posts · 832 votes
    2y
    Quote from @Carrie Zhang:
    Quote from @Hamp Lee III:

    Would your friend be willing to partner on a smaller project?

    Consider where you will spend a majority of your real estate investing. You can make a large sum with the first option as is, but it will be outside of what you might learn for future projects, though there will be similarities.

    If there are no changes. I’d go with option 2 as well.

    I wish you all the best.


     My friend is only interested in doing higher-end projects... 

    Upstate New York is an interesting market because you have a lot of people who are buying as their second home(or first and have their home base in a rental in the City) and that's where most of the appreciation has come from. The smaller projects are scooped up quite quickly and have a different end user (mostly local residents) from what i can tell. So I'm wondering if it would be a good idea to enter into the higher end bigger projects as my market, or is that too much risk for my first Flip project?

    As long as you’re not the “second seat” and not actively trying to work everything yourself. You don’t want to take on too much on your first project. If you can learn while you go and see your first work things firsthand, that might work for you.
    0Reply
  • Randall Tannen
    CPA | Accepting New Clients · Member since 2022 · 62 posts · 36 votes
    2y

    @Carrie Zhang the Hudson Valley market has been and remains hot, with less inventory/higher rates. This is probably more of the issue (i.e. finding a sensible entry price) than deal size (solo or with a partner).

    0Reply
  • Marcus Auerbach
    Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
    2y

    If you can generate a profit during rehab it's worth it. In order to do so, you need to be able to buy at a discount that accounts for condition. In a market with less than a month of inventory that is very difficult, sellers lack the motivation to negotiate, even for a house in dated condition.

    I have been doing BRRRR's in Milwaukee for about a decade and the last 3 came out with negative equity (at the time) after a 60-70k rehab. Fortunatly appreciation took care of that since, but we have switched to buying move in ready properties that do not requite a 4-5 months gut rehab. I have picked up some deals that fell trough on financing and the frustrated seller accepted a 20k hit in exchnage for a no contingency offer just to be done with it. That is basically half the equity a good BRRRR might generate after months of work..

    0Reply
  • Carrie Zhang
    OP
    Investor · NY · Member since 2023 · 19 posts · 10 votes
    2y
    Quote from @Randall Tannen:

    @Carrie Zhang the Hudson Valley market has been and remains hot, with less inventory/higher rates. This is probably more of the issue (i.e. finding a sensible entry price) than deal size (solo or with a partner).


    Yeah I need to get creative with finding off market leads. Very few on market transactions. If you know of anyone doing deals in the Hudson Valley I'd love to connect with them!

    0Reply
  • Evan Polaski
    Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
    2y

    @Carrie Zhang, granted I am in a much less expensive market, but if yours is like mine, I would err to the higher end.  A) you have an experienced partner.  B) the lower end properties do have more competition, and because of that, the only real way to create value is to buy something that entails a larger scope than a retail owner wants to take on.  Or put another way: every first time home buyer has watched HGTV and thinks rehabbing a house is easy.  As such, they are willing to pay a premium to get into a house that only needs cosmetic work.

    Given that, you could very well be looking at full guts for either property, so permitting, scope of work, etc could very well be the same on both. And even though percentages are the same $300k all in to $450 ARV or $600k all in to $900k ARV, a $50k miss on the smaller property is a 33% reduction in return. A 50k miss on the higher end property is only a 17% reduction on return.

    And lastly, if you are a designer and get personal fulfillment in executing unique ideas (like my wife) then more budget = more personal fulfillment in the project.  On our lower end projects, there are ALWAYS concessions made to try to stay in a tighter budget.

    0Reply
  • Steven Goldman
    Lender · PA · Member since 2019 · 533 posts · 461 votes
    2y
    Quote from @Carrie Zhang:

    Hi BP! I'm looking to do my first fix and flip deal in a new market, Upstate New York (Hudson Valley areas). I have rehab experience with SF long-term rentals in MI, but it has been a few years since I've been close to any construction. I think I have two options to get my first deal off the ground and would love your thoughts: 

    1. Partner with a friend to work on larger projects with greater upside (600-700K total cost with 900K+ ARV)
    - They have been doing luxury value-add STR (but never a flip) in the higher end Hudson Valley markets since the pandemic
    - There's likely less competition at that price point
    - It may take us longer to find the deal and obviously a larger projects also likely means longer timeline.  I'm at a greater disadvantage because my part of the funds has a higher financing cost 
     
    2. Start with a smaller project on my own (300-400 total cost with 450-500 ARV)

    - I would need to learn new markets and manage the risk of rehab on my own (I can borrow my friends contractor so this may not be as bad of an issue) 
    - There's more competition at that price point
    - I would be able to start and finish quicker (hopefully) and get actual flip experience under my belt

    I'm currently casting a wide net for deals at both price points and I'm very eager to get started (I've committed to doing real estate full time). Would love to hear people's thoughts and if there are other considerations I should think about. Thanks!

    P.S. Sorry about the confusing title - I tried to edit the post but couldn't change the title. I am originally also wanted to know, if total costs are the same, would people rather spend more on the purchase price or on the rehab? 

    Hi Carrie, I must agree with all of the recommendations to start with the smaller project. If you have not done a rehab. in a while you ill learn that costs have increased and that risks are higher in the current market.  One must walk before they can run. Good luck.
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