Low End Rehab Questions

25 Replies

Hey everybody,

Had a quick question to gauge the opinions of BP. NO holds barred, let me know what you think.

There are a large number of $12-15k properties in my area that need $10k worth of work on average.  ARVs in the $40-45k region.  I'm not looking for a critique of the numbers though.

These houses aren't in the best areas, and would be a rehab/rental that I would sell as such.  Working class poor is what I would describe these neighborhoods as. These would be hands off projects.  Is it worth the time and effort to get these properties, or do you think that generally landlords would do this themselves?  Just asking for some advice on a tricky area of the market.  

Thanks to everyone in advance!

PS.  Rents would be in the $600-700 range.

Personally, I think it's worth it, although you may have to have different rental guidelines criteria & safety precautions during & after rehab.

I'm not sure what you're asking.  Are you looking to buy them, fix them up, and sell them to landlords?  Are you asking whether they are worth the management effort?  That's kind of hard to know without knowing your experience, goals, time commitment, etc.   You state these would be "hands off projects."  I don't understand.  Are you saying you've found management for them?  If not, my observation is that it is much harder to find management for lower end properties.  (Which I presume these are.)   Finally, I can't tell from your description if these are D properties (ghetto, gangs, etc.) or C properties (working class).  "Working class poor" leads me to believe they are C properties, but the fact that you're asking and the low price point makes me question whether they are really D properties.  Not trying to jump on you, but if you can clarify these points, I think you might get a better response.

(214) 707-2185

@John Chapman .  I'm sorry I didn't make that a bit more clear.  

The plan would be to do the rehab and sell to landlords in the area.

I would consider the properties C class.  Some crime, not ghettos, but just lower end properties that the rest of the area.  D Class properties are in a different area of my market, but a close or lower price point and are in areas with blight and gangs.  I should have mentioned the properties I'm looking at are also all REOs.  You can get a tenanted rental in our D class areas for $12k or lower.    

@Mike D'Arrigo .  Generally in Akron, D Class properties are in the sub $20k with a tenant in place paying $450/mo.   Again, I'm not debating the numbers as they are what they are.  Just talking about the strategy.

A C Class in Akron, just for examples sake. First one I found, and not in great shape compared to others I've looked at.

http://www.zillow.com/homedetails/1700-Malasia-Rd-Akron-OH-44305/35450232_zpid/

Seems like a high ARV with those rentals values in the rust belt.

You gotta remember, if you're going to sell to another investor, there's gotta be some meat left on the bone.  Unless you can move all the way up to a turnkey operator who is selling to passive investors, you're likely going to be selling to an active investor.  An active investor is looking for distressed properties or to buy equity.

One last thing I haven't seen discussed, you need to be far more careful on construction site security in those kinds of areas.  Construction materials are easily stolen and resold... and a building under heavy construction is a dead give away that no one is living there protecting copper, fixtures, appliances, etc.

@Nathan Emmert .  Excellent point about site security.  On the last rehab I did, I actually hired the next door neighbor to do some demo.  He's been helping me out since and it's a cheap way to have a set of eyes on the property all the time.  

@David Humphrey  

  I believe the locals who specialize in owning this asset class with just do it themselves. I don't see a lot of value add for you to buy and rehab and then resell basically turn key.

the profits when you do the Turn key come when you can sell to out of area folks who cannot do this on their own and will pay a premium for your service. but you MUST have PM set up and ready to go for them so on and so forth.

Now one thing you might consider is creating a type of JV deal with local professionals that are looking for passive cash flow you set up a company and you bring them in as cash partners you do all the work take an equity ownership.. charge an up front fee for facilitation then either you manage the manager or since your an owner and if you love dealing with tenants you manage them for a fee. That could work in your area..

I do a lot of affordable housing up in New York. These things are great when you can be hands off but I like holding them as rentals. Do you know a lot of people in your area that you might be able to get in touch with who would buy and hold them?


Troy

@David Humphrey  Good question. I am a buy-and-hold investor in Colorado. I buy houses for $15,000 to $30,000. Then I put $10,000 to $20,000 into rehab. Finally, I refinance them with the bank to get some/ most of my cash back and turn them over to a property manager. Most of the properties would probably be considered C class.

I've found that most flippers I've come in touch with stay away from these properties for a couple of reasons. First, the margins are pretty small. It is a lot of work to rehab a vacant property. Flippers like to work on a properties where they can make a bigger pay day at the end. Second, it is easier for me to get a decent appraisal than it would be to sell the properties to another investor or owner occupant. I might have $35,000 into a property and it might appraise for $50,000. But if I was a flipper and needed to find a buyer for $50,000 it might take 6 months to a year.

So keep those two factors in mind if you move ahead with your plan. I might be better to pursue your strategy in a nicer neighborhood or consider holding the properties and turning them over to a property manager.

Mike

@Michael W.  Excellent ideas.  It sounds like your market is pretty close to mine.  I wouldn't have to sell, being that I do them with all cash, but I like to stay liquid due to previous life experiences that I can't overcome mentally.  It's strange not being poor when you were for a long time. 

@David Humphrey You can stay liquid and build up a portfolio of rental properties. You seem to know your area and know a bit about the rehab process. That was more than I knew when I got started. But the key is being able to refinance your cash back out when the rehab is done and still having a cash-flowing property. I actually use a partner's money now to do the acquisition and rehab. When the property is fixed up (about 3 months), I have my lender (a regional bank) send in an appraiser. I might have $35,000 in the property, but the appraisal might come in around $50,000. So the bank will give me a loan for $37,500 (75% LTV). I take that cash and pay back my partner (with interest) and turn the property over to a property manager. Even if I was using my own money, I would still be liquid.

Mike

@David Humphrey In addition to crunching some numbers to make sure the property will cash flow and knowing your area, the two big numbers you need to get right are your rehab estimates and your ARV (your appraisal). I've missed on these on the first couple and left some cash in the properties. But I'm learning a ton and I think I'm going to start breaking even or making money on the rehab. Even leaving some money in the property isn't the end of the world, because you now have a cash-flowing property.

I also appreciate learning in markets where the numbers are smaller. In your market and mine you can make mistakes which won't bankrupt you.

Mike

Look at your demand? Make sure if you are doing this for someone else they are willing to pay for it.

If you do it for yourself make sure its worth it and the repair won't eat you alive. 

Do you have someone that can help you further analyze the comparable sales? For the ones that are selling in the $45K range:  who are the buyers?  how many are now owner occupied? how many are rentals? of the rentals, who owns them and are they local or out of area? what loan products, if any, were used to buy? what's the condition and/or level of rehab of the ones selling at the top end?

I wouldn't buy properties in that price range without having a solid exit, so I'd need to know who is really buying and how they are paying.

@Michael Wentzel  

  are you doing what you state above in Colorado Springs? or out of area . I was not aware you could buy properties on the front range for that low amount of money.

And If your doing it out of area and getting a regional bank to refi you on low end rentals that's a pretty neat trick. My experience has shown me that regional banks will normally only loan to those that live in the community ( for the purposes of creating rental portfolios at those price points and loan amounts)... But they will go above 10 homes.. Although the loans are usually amortized over 15 to 20 due in 5.. what are your terms?

Since you won't be managing these yourself, research PM's currently working in the area.  They should be able to provide you solid numbers on what other investors are making.  They can also tell you about the proclivity of the usual management headaches such as long vacancies, property damage, etc.  If you can show the numbers will work with the amount you will be investing, then you should be able to prove the same thing to the investors you're planning to sell these properties to.  

Another strategy would be to try and buy several properties in a row, or at least in the same area.  That way it is easier to rehab and manage the properties.  Also you can be the one that brings up the value of the whole area.

Originally posted by @Jay Hinrichs :

@David Humphrey  

  I believe the locals who specialize in owning this asset class with just do it themselves. I don't see a lot of value add for you to buy and rehab and then resell basically turn key.

the profits when you do the Turn key come when you can sell to out of area folks who cannot do this on their own and will pay a premium for your service. but you MUST have PM set up and ready to go for them so on and so forth.

Now one thing you might consider is creating a type of JV deal with local professionals that are looking for passive cash flow you set up a company and you bring them in as cash partners you do all the work take an equity ownership.. charge an up front fee for facilitation then either you manage the manager or since your an owner and if you love dealing with tenants you manage them for a fee. That could work in your area..

I'm no stranger to the price difference when selling to out of area versus the locals.  For sure, out-of-area buyers have been a big contributor to my income.  I don't offer ARVs or rehab costs or rental projections. I assume the buyers know what they are doing.  I now know this is not true.  After doing this for 15 years in one of markets I can say that most out-of-area buyers fail.  Could be 2 or 5 or 10 years.  Unless they are lucky enough to sell in an upswing, they take a loss.  Truly poor quality tenant pools and PM is the biggest problem.  My local buyers are all still in the game, still own most of what I sold them. 

I have concerns now that I didn't use to have that selling to out of area buyers is pretty much a set-up for failure. 

Kristine Marie Poe 

  I assume this is a CA market your talking about... it gets even worse when CA or off shore investors go into low end assets in the mid west north east or deep south.. mortality rate is very high.. and length of ownership is very low.

Logic dictates in a market were 40 to 50% of the homes are rentals.. that at least 40 to 50% of the foreclosure or vacant homes are from landlords who failed.. And then the next wave of I am going to be buy and hold and comes in and try's it.

I have had extensive conversations with lenders in the Mid west and deep south.. Trustmark, Regions, Community Bank. .. And they just won't lend to anyone who lives more than a 100 miles from the assets.. they already understand what you have just delineated in your post above.   Now I know there are exceptions for sure.. I know that in Texas for example you can get regional banks to lend to off shore and out of state..

And as you state locals that live there and work in the market place far much better.. Especailly one's that leave there day jobs and live off of cash flow.. they create a business and run that business the income from the business just happens to be rental income. the fallacy that this is not work is prevelant for sure.. its just different than sitting in a cube. It may be more rewording and one who has never worked for themselves sees it as freedom. Me personally I see rental portfolio as HARD work and being a slave to tenants  LOL...

@Jay Hinrichs  You are correct Jay. One can generally not find properties at the prices I'm talking about in Colorado Springs or Denver. Most of my properties are about 40 miles south of Colorado Springs in Pueblo.

I kind of stumbled across this regional bank that is doing portfolio loans for me. I initially started doing business with them for a couple traditional 30-year fixed mortgages. When the loan amounts became smaller, their mortgage banker said you should talk to the branch president about some commercial/ portfolio loans. They have become a great partner. As soon as my rehab is done, they will send an appraiser to get the refinance started. 

I have 2 portfolio loans with them at the moment and hope to do 6-8 more this year. Some of the portfolio loans will be refinanced into 30-year fixed loans this year as well. The terms are 5% for five years with it amortized over 20 years. They are doing 75% or 80% LTV.

I haven't been in this business long, so I don't have much to compare them to. But having limited experience and limited cash, I've been really happy that they have been willing to work with me.

Mike

@Michael Wentzel  

  Yahtzee  !!    As I surmised you live within 100 miles of your asset so the local lender can get a good feel for you... 20 due in 5 is a very standard commercial loans that most of us in the business enjoy on a multitude of different assets.

Good Job finding a niche without having to venture into the far riskier out of state low end rental game.. you no doubt should do very well.  The prices of homes in Pueblo will rise 20% based on this thread  LOL..

What are the rent ratios your bank looks for is it 1.25 CR or Better ?

I have a few clients of mine that I do the A and D for like your investor is doing then they refi out so I am only in the deal for 90 days or less.. works great for all.  I want short term high yield they want long term buy and hold.. One of my Vendors added 67 properties to their portfolio last year and I financed all of them on the A and D side.  !!

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