Hey guys, I am still looking for my first deal and back on the hunt! Buy & holding "average plus" properties in my area doing yield a positive cash flow in my area. My new strategy is to rehab a "fixer upper" and turn it into an asset that produces positive cash flow.
Below are some pictures of a 3b/1ba 1300 sq foot house. What do you think an estimate would be to do a full rehab to this property? The end goal is to rent it out so basically going low-end on a lot of things.
Quick Financials:
50K listing price *bank owned*
~$350 taxes per month ($4200 per year)
Median Rents - $1450 for 3br (rentometer.com)
Any advice would be appreciated, thanks!
Judging by the pictures I would have the roof looked at first and foremost because that's going to be the most expensive thing for this rehab. I say that because it looks rotted out and if that is the case then there is no telling how the attic is going to be and the trusses inside. I would figure maybe a third of your rehab budget going to that early in the planning and get it fixed first because if it leaks and rains during your rehab all your inside could ruin and you'd have to pay double for it. I say this because my parents went the cheap route on their rent house and the roof practically is falling apart to this day.
I agree on a new roof if almost certainly needed. It looks like a lot of water damage from the pictures. I would estimate at least $20k-$30k doing the work myself. A total gut and rebuild takes a lot of time especially if you do it right.
@Kyle M.
Its a pricey fix and flip(I'm going to agree with the masses here and call the $50K+ rehab cost) for sure and thats just looking at the bare walls and floors. Who knows what will be found when the electrician and plumber gets to working. There looks like a tree issue may need to be addressed also. What are the comps?
I'd agree with Anthony Dooley and work the numbers to your best advantage possible. You can contest the property taxes especially if you buy and hold. I'd offer $35K to $40K max because its a serious full renovation project and as you stated people are leaving the area. I wonder if the bank has seen those pictures. It can help make your point when submitting / adjusting your offer. If you can get it up to code with just a few niceties (after the major repairs are completed) enough to secure a good tenant, maybe a lease/option would be a better strategy here. It can cut that full rehab price tag in half.
Kudos,
Mary
Its a fun scenario to look at it. I would say that I think the biggest factor here would be how much do your contractors make? Ultimately, its only a 3/1, 1,300 sq ft. You only have one bathroom, one kitchen, and 1,300 sq ft.
One key fact you didn't include is how much would the house be worth once the rehab was completed? There's a huge difference in taking on this kind of deal if you can buy it for 50k and put in 40k and have it worth 160k. Versus buying it at 50k, putting in 40k and having it end up worth 110k.
At 90k, your payments will only be 550/month. If taxes and insurance another 400/month, and rents for 1,400, you're in business. Thats a solid deal. Even at 100k, lets say you put in 10k and have a 90k mortgage, thats still the same 550/month only your out of pocket is now bumped by 10k.
If you can get a gross profit (profit before vacancies and repairs) of $400 a month or more based on a mortgage with no money down in the deal, then thats a good deal. Obviously, most people are going to put money into the deal but that just means your profit will be greater but your returns less.
I'm not seeing a complete gut. But I think your rehab budget depends a lot on your true scope of work of the stuff we can't see and also on how much your contractors are going to charge. Are they $30/hr guys doing most of the work? Or are they custom builder types that are going to cost out around $60 to 70 an hour?
Here's a breakdown of the bigger items that I've had to pay before:
1) 5k New hvac system for a 1,300 sq ft house - Estimate: $4,500 to 5k (1k furnace, 2k for a/c, 1,500 to 2k for install. Assumes no ductwork needed.
2) $750 Water heater. $750
3) 4k Kitchen cabinets and countertops (rental). (2k for cabinets - medium grade RTA, $700 for tops, 1,300 for install).
4) 2k for appliances (stove, microwave, dishwasher, and fridge)
5) 4k for bathroom (tub, surround, vanity, toilet)
6) 5k in flooring. 900 sq ft carpet (1,800 - $2/sq ft using lowes whole home install deal), 400 sq ft tile (utility room, kitchen/dining, bathroom, and entry way) (3k). Tile assumes nicer $2.25/sq ft tile and durock installation. I pay roughly $8/sq ft for labor and materials when having to put down durock (i.e. basements I just pay $4 to 5/sq ft)
7) 1,200 light fixtures.
8) 1k in plumbing repair (I just always include that line item)
9) 1k in doors/knobs
10) 3k in drywall repair (looks like very room is going to need drywall repair)
11) 1,500 painting
There's just under 30k.
Still need to factor in if any repairs/replacements are needed for:
a) Roof
b) Windows (are they all ok?)
c) Electrical
d) Floor (looks like the one bedroom might be sagging or just a really odd pic)
e) Outside work needed?
I don't know if I would think you could spend 60k on a 1,300 sq ft house with only 1 bedroom though. Thats a pretty big rehab budget in my area. Not unless you were rehabbing to flip maybe. But for a rental, where you aren't putting crown moulding up or doing granite or tile in shower. I just don't see that big of a rehab on this size house for a rental.
This deal would depend on a couple of items What is your ARV? Are you paying cash? I would not purchase without considering 2 bids from contractors regarding the rehab. I would consider fixing it and selling the home on installment terms(land contract). With the purchaser paying monthly payments that include taxes and insurance. This will allow you the benefit of the monthly cash flow with no responsibility of a landlord. If the rehab is over $15,000 I would consider offering less for the home.
Well from the pics i wouldnt call it a whole gut job or at least my definition of a gut job most of it has sheetrock already patch it up scrape off old texture and re texture whole house. Here where im at i rehabbed two of them that kind of looked like that 1200 sf- 1500 plumbing, central ac, upgrade breaker box ,floating floor on most of the house on one i spent 20k and the other one close to 30k used a couple of handymen
@Reginald Perryman @Mike H. Looking at pics makes it hard to give a definitive answer on that, but if you look at leaks and mold etc I would guess the rock is trashed enough to justify a gut job. Pics are vague, but I'm guessing from them that it is still leaking and in need of major repairs. You might get away with less, but I wouldn't unless it was solid and no mold. Plus I would want to see studs and joists with all that water damage. If I'm going to buy it and put a big chunk of change in it, I'll do it right or leave it behind for someone else.
Its a fun scenario to look at it. I would say that I think the biggest factor here would be how much do your contractors make? Ultimately, its only a 3/1, 1,300 sq ft. You only have one bathroom, one kitchen, and 1,300 sq ft.
One key fact you didn't include is how much would the house be worth once the rehab was completed? There's a huge difference in taking on this kind of deal if you can buy it for 50k and put in 40k and have it worth 160k. Versus buying it at 50k, putting in 40k and having it end up worth 110k.
At 90k, your payments will only be 550/month. If taxes and insurance another 400/month, and rents for 1,400, you're in business. Thats a solid deal. Even at 100k, lets say you put in 10k and have a 90k mortgage, thats still the same 550/month only your out of pocket is now bumped by 10k.
Wouldn't this be an example of a negative cash flow deal. 700-950 = -250. Am I missing something here?My understand was the rent was 1,400. Taxes were 350, insurance i guessed around 50/mo. So if payments 550, and taxes and insurance 400, then thats 950 a month. 1400 minus 950 equals gross profit of 450 a month.
Not sure were you got 700 from or if I mis-read something. First post said rents were about 1400.
My understand was the rent was 1,400. Taxes were 350, insurance i guessed around 50/mo. So if payments 550, and taxes and insurance 400, then thats 950 a month. 1400 minus 950 equals gross profit of 450 a month.
Not sure were you got 700 from or if I mis-read something. First post said rents were about 1400.
There's a lot more besides taxes, insurance and mortgage payments. What about vacancy, maintenance, capex, turnover costs, utilites, lawn care, property management, legal fees when you have a bad tenant, etc?
Popular rule of thumb around here is that 50% of the gross rents will go to vacancy, expenses and capex. So, that means 50% of $1400 goes to these things, leaving $700/month for mortgage and cash flow. If mortgage is $550/month, that's about $150/month in cash flow.
want to thank everyone for the great responses, changed the way that I view these types of deal. I also noticed a big mistake that I was making in the 50% rule, I was including taxes as negative expense when really the rule assumes average taxes.