Is This A Deal? - Rehab for Buy and Hold Property

6 Replies

Hi BP Community,

I'm evaluating a buy and hold duplex (3/1, 1/1.5) to house hack with moderate rehab necessary to drive up rents to market value and stay competitive with more modern rentals in the Philly area. My requirements are $100/unit in positive cash flow and to hit the 1% rule. I've done so but...

We originally planned on ~$35k, but received an inspection report that requires an additional ~$13k in structural, electrical, and other work. My girlfriend and I plan to live in the first unit (1/1.5) and rehab the second unit (3/1) first to rent out. We will be funding the deal with an FHA loan (3.5% down), and all rehab costs out of pocket.

My question lies in the calculation of rental income when running numbers in the BP Rental calculator...

Should I input the rehab costs and anticipated post rehab rental income when searching for my "homerun" offer? Or should I use comparable rental income for the duplex in its present pre-rehab state?

Here are the numbers I'm working with:

Asking Price: 270k

Est. Rehab: 48k

Offer: ???

Any and all feeback is much appreciated!

Thank you,

Jesse

@Jesse Fields

What area of the city you are looking at?

Most of the duplexes in Philly are not sold for it's value based on the income they produce. The prices are based on previously sold in the area similar houses. Also it depends on how hot is the market in that area. Your agent should be able to provide you with the comps.

Also I noticed that on the $215K purchase price you are budgeting $5K closing costs. I think the closing cost for that price would be in $12K area, unless if you are using on of the first buyers programs that are covering some closing costs for you. If you do not know about the programs hit me up, I will send you the links. 

Calculate cash flow based on after reno rents if you are doing the reno right away. FHA loans also have a monthly "pmi", so be sure your expenses are correct. Are you applying for an fha(203k) loan? If the property needs renovation, I don't think the property will be approved for the financing. Something to inquire about before putting in an offer.
Originally posted by @Yuriy Skripnichenko :

@Jesse Fields

What area of the city you are looking at?

Most of the duplexes in Philly are not sold for it's value based on the income they produce. The prices are based on previously sold in the area similar houses. Also it depends on how hot is the market in that area. Your agent should be able to provide you with the comps.

Also I noticed that on the $215K purchase price you are budgeting $5K closing costs. I think the closing cost for that price would be in $12K area, unless if you are using on of the first buyers programs that are covering some closing costs for you. If you do not know about the programs hit me up, I will send you the links. 

@Yuriy Skripnichenko, 

The house is located in the Manayunk/Roxborough area. Thanks for the info, and catching my underestimated closing costs. Can you please send me the link for the first time buyers program?

Originally posted by @Jason DiClemente :
Calculate cash flow based on after reno rents if you are doing the reno right away. FHA loans also have a monthly "pmi", so be sure your expenses are correct. Are you applying for an fha(203k) loan? If the property needs renovation, I don't think the property will be approved for the financing. Something to inquire about before putting in an offer.

Thanks, Jason. I included the PMI at $137/mo. The mortgage broker I'm working with does not support 203k loans, so I'm not currently seeking them out for my first deal.

Jesse

@Jesse Fields I would make an initial offer based on present condition, even if the projected rents are conservative and you are pretty certain with it, I always try to run my numbers based on present condition, not potential. Since we are in a market that is willing to pay more for less right now, the offer may be passed by, but if it's not a new, hot listing, it can't hurt to try. If you are working directly with the listing agent they will be even more motivated to help you close on this, but definitely consult the appropriate professionals to cover your bases on due diligence.

Thanks, John. For situations like these where a house requires minor rehab to rent, but a more thorough rehab to boost rental income, I'm starting to run the numbers both ways. That way I can cover my bases and insure that the house will still cash flow in both cases.

As an update, for this particular property the house would do well if a low offer (~210k) is accepted. But I'm not willing to risk the large amount of capital that would be required to rehab this property for my first deal, since it would only generate a 6% CoC ROI. On to the next one!

Jesse

Join the Largest Real Estate Investing Community

Basic membership is free, forever.

By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.