Overbudget Live-in Flip. Advice?

Question

Hello BP!

My wife and I recently started our first foray into real estate. We bought a home in Del Rio, TX that we are rehabbing, and plan on selling in about a year and a half when we leave the area. We purchased the home for $139K, which is at about 86% of the highest projected ARV (big mistake I know). However, the rehab quickly went over budget as is apt to happen during a first time experience. We are about $12K over and still have some work that we feel we need to complete to make the home even worth selling at ARV.

Seeing as we are already over, should we continue with the rehab and try to go a bit above the ARV on resale or should we focus on turning this into a rental? Del Rio is a small town on the Mexico border whose primary source of economy is the nearby Air Force base. The current mortgage on the home is $1010 and average rent in the area for a comparable home is $1200 - $1400 and we would more than likely want to use a property manager. What advice would you all give on this situation?

Thank you!

Roderick T. Byars

Will Barnard · Answer

I second the advice from @JD Martin

Don’t turn what is a poor situation into a disaster situation. Renting will not produce profit per your numbers and you can’t do half or 3/4 of a rehab so finish as economically as possible and sell for as much as the market will allow.

As JD states, even if you just break even, the learning experience of doing it is priceless and the mistakes you made are just the cost of your real world education.

Don’t repeat the same buy mistake and for flips, buy in areas with good schools, good job growth and good population growth. Going against that grain will likely result in what you have now, and of course don’t buy at 86% clips anymore, that equates to losses.

JD Martin · Answer

You don't have any room to make any money based on your current mortgage cost. I would finish up the flip as economically as possible and try to sell and at least break even. Don't despair, as plenty of people make little to no money on their first real estate venture; you get better (hopefully!) as you go on :)

Alex G. · Answer

Finish the rehab, sell the house for what it is worth, take a loss if you have to and move on.  Trying to break even would only prolong the agony and likely deepen your losses.

Joseph Moore Jr · Answer

The rental is a good idea. Unfortunately, you have no room for profit there. Maybe you could rent it by the room to bring that number up. Worst-case scenario if you sell you just won't make a decent return. Then it is lessoned learned.

David Valadez · Answer

@Roderick T Byars We are local investors in the area currently undergoing a flip.  You may want to review labor costs, since those can eat up the budget quickly.  Make sure you are getting several estimates from reputable trades.  Reach out if you need suggestions.  Wish you the best!

Roderick T Byars · Answer

@David Valadez thanks for the heads up. Most labor costs are already spent for us. The last bit of rehab we have left is pretty DIY. We just have to make sure not to overspend on those elements.

Roderick T Byars · Answer

Thanks for the replies guys! I am along the same thought as you all. I am definitely looking at this as a big helping of lessons learned and I'd like to just try to minimize losses as much as possible. Just wanted to get some perspective from others first. Thanks for the words of wisdom!

Overbudget Live-in Flip. Advice?

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