Flip, Buy and Hold or Pass?

Question

I was offered an off market 1 family that has 6 bedrooms and 3 baths but needs to be totally renovated. The house is in an area surrounded by multi family homes and after checking with zoning it’s zoned in a multi family area also. It needs to be converted to a 2 family but due to no off street parking it will require a variance, blue prints, survey, and an engineer in order to have a chance at converting it. The property needs about 120k for rehab costs and purchase amount is 110k. All in 230k and comps for 2 family homes are around 320k to 340k.

Here’s where I’m wondering if I should pass or flip or even buy and hold. The market is so up in the air and we don’t really know if those same resale values will be there let’s say in 8 months. Assuming it trends downward a little would you do this deal knowing rehab will take 4 months and by the time you get approved for the variance and meet with the board it could be another 3 months meaning total time spent on this project could be 7 to 8 months before you could resell it for profit? Deals are few and far lately so I feel like I should do it but it’s going to be one uphill battle and by the way There is a chance it does not get approved for conversion which would than be a value of 250k on a newly renovated SFR. I would break even if it got denied but on the other hand it could be a great pay day if the conversion gets approved.

What say you BP community? Deal or No Deal??

Whitney Hutten · Answer

Thank you for clarifying @Bruno Nunes .  I'm not sure I would stick it out for a deal that I "might" break even on especially given we are close or at the top of the market.  There are so many other deals out there where you can make money now!

Bruno Nunes · Answer

@Whitney Hutten thanks for the reply. All In I’d be at 230k with aquistion and rehab cost. I’m going to use cash for the entire project and I have a line of credit set up with my business to be able to tap into 90% of that 230k if needed. I’m expecting this project to be more of a 7 to 8 month project because of waiting on the city to approve the conversion which takes a few months to do. If they don’t approve it that’s where this deal looks like a waste of time as a single family I’d break even. If the conversion goes through all in 230k and resale value of anywhere between 320k-340k. I’m leaning towards waiting on a better deal as well.

Whitney Hutten · Answer

@Bruno Nunes So you would be all in for $330K for purchase and rehab if I understand this.  How are you planning on financing it?  Can you get all of your money out or are you planning on leaving money in the deal?

Also, if your timeline is 4 months for rehab you are in August now if everything goes well.  Can you get strong rents at that time of year?  What about sales?

And since this would be more of an investor deal, you may need to consider where rates will be at that time (which we don't know if they are going up or down).  Just factor that into the model.  It looks like rents would put you at $3600 which on a $340K ARV is over 1% so that is good.

I had a deal similar to this and just couldn't stomach the timeline, the unknowns, and the need to be liquid for upcoming deals.  While this could work... I personally would pass for more of a slam dunk deal.

Happy to help you pick through more numbers!

Bruno Nunes · Answer

4 bedroom will be between $1500 n $1600 being conservative and 2 bedroom would be $1100 to $1250. I’m probably looking to fix n flip on this. Rehab estimate is a close estimate on 120k based off experience. Taxes aware currently only $5400 a year and they’ll increase around 30% for a 2 family. So let’s say $7000.

Jaysen Medhurst · Answer

@Bruno Nunes, what are the rents for 3/1 or 3/2 properties in the area? Make sure you're conservative since you don't have off-street parking. If you can get at least $1800 for each unit, this might be a good buy-and-hold. Make sure you really run your numbers. NJ taxes can be a killer and yours are likely to go up after the renovation / conversion.

There are a lot of unknowns here. I'm a bit skeptical of your reno cost, especially to convert this to a duplex. That probably means rewiring the whole thing and putting in 2 new heating / HW systems. That could push $40-50k alone.