Live-In Flip On The East Side. Did We Buy Too High?

18 Replies

My wife and I are under contract on a duplex in the rapidly developing* east side of Austin, TX.

We made a $471,000 offer and are approved for a 3.5%

The current rent for the front and back units are $1,450 and $1,535 respectively. Rent-o-meter says the average rent is $1,765 for the area, so there may be some room for raising the rent (especially after the first round of updates we plan on making). AirBNB-ing our place when big events come into town could further subsidize our holding cost (#gettingpaidtocamp!).

The plan is to move into the back unit. Renovate for a year. Move into the front unit. Renovate for a year. We'd like to do the renovations ourselves so we can:

  • learn how the guts of a house work to become better investors
  • capture more of the equity with our sweat
  • pay for the project as we go
  • save money on material costs w/ CraigsList and Restore purchases
  • become more flexible, capable humans

We also think it would be fun.

After 2 years, we will try to sell each unit individually as a condo. The units are already metered separately so this should only run us an extra $3,000 to $4,000 in legal/survey fees + a fence.

We technically have the lot space to increase the size of the structure and turn these small 2/1 houses into 3/2s. Comps show that could give us a very high after repair value:

$900,000 https://matrix.abor.com/Matrix/Public/Portal.aspx?...

However, the plan is to keep the units as 2/1s. Do a full interior exterior remodel. Landscape. Take care of some deferred maintenance. Add an HVAC system to the front. And possibly add a nice screened in porch to make the back unit feel bigger.

$700,000 https://matrix.abor.com/Matrix/Public/Portal.aspx?...

I can't imaging the reno costs on the less ambitious 2/1 route going over $100,000 with us doing 50% or more of the work. That would leave us with a potential six figure profit/earnings as long as the market doesn't turn on us or interest rates get too high. If the market does go down, we can hold the duplex as a primary residence or full (breakeven) rental while we wait for things to bounce back.

After J Scott's big post on inflated prices in primary and secondary markets, I'm a bit nervous. Especially since the Austin's supply of rentals seems to growing so fast... our back up rental plan might have us loosing money every year.  

What do you think Austin Investors? Are we setting ourselves up to buy high and sell low? Or could this be a good real estate learning experience for me and my wife? 

Thank you for any insights you may have.

Sincerely,

Zack

If this is your first purchase, suggest to look at something less risky; lower purchase price, newer, etc.  There are plenty of value add projects around the ATX area for less than $400k even some in the $200's quite often. Remember that the key trades require licenses such as plumbing and electrical where you cannot do any of this yourself. Also, doing work yourself you need to watch out for code compliance as that can come back to bite you bad if you have to completely redo something because home inspection from your future buyers turns out that you did something not up to proper codes....

careful of taking an owner occ property and turning it into inventory.. talk to your tax person.

you want to keep that 500k tax free in play.. the fact that your renting half maybe you only get half the tax treatment.

and usually if you do less than 7 sales in a year your not considered a dealer.. 

but do check.. makes a difference on tax's  

This looks all great on paper, but in reality expect to come across issues!  I like that you’re willing to learn, but do know that many of us have made some costly decisions on the first round trying to learn. With that being said, nothing wrong if you can afford it and understand that it can happen. But if you’re one paycheck away from not being able to afford a major loss is another issue.  I don’t trust rent o meter for this area. What part of east Austin are you looking at?  No matter what, it’s still east Austin and in some pockets you’re going to need to re-evaluate your rental.   Last but not least: if these units are already liveable and ready to rent, why not do it?  Don’t spend any money renovating. Rent them and you may just end up with long term tenants that keep paying the bills/mortgage. 

Def do your homework with code compliance and getting city permits as well as hiring qualified people for the jobs that you can’t do (licensed etc)

I run a duplex down the road from you. Your odds of making this profitable are very low. If your timing is off by just a few weeks in the current rental market, you'll be lucky to get $1450 for the 2/1 and $1550 for the 3/2. 

Now if you do get them leased out during the seasonal upswing during the summer, you'll get an extra $150 each. 

Originally posted by @Beau Fannon :

I run a duplex down the road from you. Your odds of making this profitable are very low. If your timing is off by just a few weeks in the current rental market, you'll be lucky to get $1450 for the 2/1 and $1550 for the 3/2. 

Now if you do get them leased out during the seasonal upswing during the summer, you'll get an extra $150 each. 

Thank you. I think you are right about the rent. The supply for rentals seems to be ever increasing with those huge condo/apt builds in the area. We plan on living in the back unit. The front unit's lease is up in July and they've indicated they'd like to stay. The profit we were hoping for was in the increased value we'd add by fixing it up and selling them as separate SFUs.  

Originally posted by @Nina Hayden :

This looks all great on paper, but in reality expect to come across issues!  I like that you’re willing to learn, but do know that many of us have made some costly decisions on the first round trying to learn. With that being said, nothing wrong if you can afford it and understand that it can happen. But if you’re one paycheck away from not being able to afford a major loss is another issue.  I don’t trust rent o meter for this area. What part of east Austin are you looking at?  No matter what, it’s still east Austin and in some pockets you’re going to need to re-evaluate your rental.   Last but not least: if these units are already liveable and ready to rent, why not do it?  Don’t spend any money renovating. Rent them and you may just end up with long term tenants that keep paying the bills/mortgage. 

The units are livable, but they would not make us money. Our principle, interest, MIP, taxes and insurance run about $3,300. Current rent is about $3,000 and (from the looks of it) not likely to go up.

I like your point on making sure everything is up to code. Electrical, plumbing, HVAC and siding were the things we wanted to hire professionals for. Kitchen, flooring, paint, gutters, patio, windows and landscaping where the things we were planning on doing ourselves.  

We budget pretty meticulously now. Our current savings rate from our W2s is about $2,000 a month. We also have about $10,000 in liquid assets after closing. What's an example of a major expense that you'd be worried about? Vacancy is one we can handle. Mold is the one that scares me. The house did have more moister than it should in certain parts of the house. Is there any way of figuring out if there is one of those time bombs hiding before we close?  

Originally posted by @Stephen Stokes :

If this is your first purchase, suggest to look at something less risky; lower purchase price, newer, etc.  There are plenty of value add projects around the ATX area for less than $400k even some in the $200's quite often. Remember that the key trades require licenses such as plumbing and electrical where you cannot do any of this yourself. Also, doing work yourself you need to watch out for code compliance as that can come back to bite you bad if you have to completely redo something because home inspection from your future buyers turns out that you did something not up to proper codes....

It does seem like a pretty big swing. This is the part of town we like and feel confident in the trajectory. It is  expensive dirt thought.    

Any suggested resources for learning about code compliance? I'll hire out for anything that needs a permit, but I'd still like to get my hands dirty! 

"Mold is the one that scares me. The house did have more moister than it should in certain parts of the house. Is there any way of figuring out if there is one of those time bombs hiding before we close? "

I've got a guy I can recommend that will come out and measure moisture levels in the walls.

Originally posted by @Zachary Sexton :
Originally posted by @Nina Hayden:

This looks all great on paper, but in reality expect to come across issues!  I like that you’re willing to learn, but do know that many of us have made some costly decisions on the first round trying to learn. With that being said, nothing wrong if you can afford it and understand that it can happen. But if you’re one paycheck away from not being able to afford a major loss is another issue.  I don’t trust rent o meter for this area. What part of east Austin are you looking at?  No matter what, it’s still east Austin and in some pockets you’re going to need to re-evaluate your rental.   Last but not least: if these units are already liveable and ready to rent, why not do it?  Don’t spend any money renovating. Rent them and you may just end up with long term tenants that keep paying the bills/mortgage. 

The units are livable, but they would not make us money. Our principle, interest, MIP, taxes and insurance run about $3,300. Current rent is about $3,000 and (from the looks of it) not likely to go up.

I like your point on making sure everything is up to code. Electrical, plumbing, HVAC and siding were the things we wanted to hire professionals for. Kitchen, flooring, paint, gutters, patio, windows and landscaping where the things we were planning on doing ourselves.  

We budget pretty meticulously now. Our current savings rate from our W2s is about $2,000 a month. We also have about $10,000 in liquid assets after closing. What's an example of a major expense that you'd be worried about? Vacancy is one we can handle. Mold is the one that scares me. The house did have more moister than it should in certain parts of the house. Is there any way of figuring out if there is one of those time bombs hiding before we close?  

 https://library.municode.com/TX/Austin

Reason I suggest to bite off a smaller project first is to get some experience under your belt first. I have been investing in real estate for 8 years and still would not feel comfort level to bite off that big of a risk. It is easy to recover from small losses but you will be digging out from a big project gone bad for many, many years. I also see signs over overbuilding in the multi-fam market as discussed in previous thread on this forum (https://www.biggerpockets.com/forums/759/topics/668351-current-perspective-on-leasing-in-austin) and am personally feeling it with 2 of my units vacant for multiple months now. East Austin will still be hard pressed to get top dollar in a short  time and with the small down payment you are making, I assume you have limited capital. There are a few facebook groups (investor above and investor below ground) that you can leverage to find contractors. I am always willing to share references as well if you DM me with a specific need. 

Originally posted by @Ian Walsh :

As a rough gauge, see if it fits the 50% rule.

 The 50% rule was actually pretty close to my actual numbers.

Negative $550-ish a month. And this thing won't be cashflowing for 16 years!

The only happy exit strategy is a successful flip. 

Last night my wife came home and we talked about what we'd be able to do/save by living there, scaling down the renovations, testing the AirBNB waters and enjoying living next to our friend group once more. We took our $120,000 reno budget and cut it to $80,000. I also got more conservative with the ARV ($640,000 vs $700,000).

The idea of tying up $100,000 is scary. Unless one of us starts pulling in a higher income at our day job, that would likely mean 3 years of more minimal contributions to our retirement accounts and missing out on that potential market return.  

But it does seem like we have some profit potential after our 3 years slow reno gamble (@ 4% growth w/ the more conservative $640,000 ARV).

The $20,000 or so growth we could have seen in the market (assuming a 7% return) looks like it could be $85,000 in real estate at 4% market growth; $52,000 at 1% growth and $13,000 at -1% growth. 

I guess the question comes down to, is the risk and opportunity cost worth the education? I'm leaning towards yes... but I'm open to more feedback. Especially form the accountant with a property right next to mine. Hint. Hint. @Beau Fannon ;-p

I love Austin ! We go there in the summers. that being said, dain this is a huge purchase price dude. I wouldnt let this be my first deal. Hell no. Half a million dollars ? geez

Originally posted by @Zachary Sexton :
Originally posted by @Ian Walsh:

As a rough gauge, see if it fits the 50% rule.

 The 50% rule was actually pretty close to my actual numbers.

Negative $550-ish a month. And this thing won't be cashflowing for 16 years!

The only happy exit strategy is a successful flip. 

Last night my wife came home and we talked about what we'd be able to do/save by living there, scaling down the renovations, testing the AirBNB waters and enjoying living next to our friend group once more. We took our $120,000 reno budget and cut it to $80,000. I also got more conservative with the ARV ($640,000 vs $700,000).

The idea of tying up $100,000 is scary. Unless one of us starts pulling in a higher income at our day job, that would likely mean 3 years of more minimal contributions to our retirement accounts and missing out on that potential market return.  

But it does seem like we have some profit potential after our 3 years slow reno gamble (@ 4% growth w/ the more conservative $640,000 ARV).

The $20,000 or so growth we could have seen in the market (assuming a 7% return) looks like it could be $85,000 in real estate at 4% market growth; $52,000 at 1% growth and $13,000 at -1% growth. 

I guess the question comes down to, is the risk and opportunity cost worth the education? I'm leaning towards yes... but I'm open to more feedback. Especially form the accountant with a property right next to mine. Hint. Hint. @Beau Fannon ;-p

 Zachary,

This is all very well laid out. But, negative $550 a month is a freaking boat anchor. Unless this is your forever home and the only investment property you ever intend to acquire, don't do it. 

Update: Did we buy, negotiate or walk? 

On Wednesday February 13th, 4 hours before the end of our option period, the owner got back to us on our post inspection requests.* Instead of fixing the front unit's roof, replacing the leaky bits of cast iron plumbing and taking care of a handful of other requests we made, he offered to take $20,000 off the asking price.

Since we had lined up a low down FHA 203b loan, we knew the house would not pass appraisal unless the major plumbing and roof issues were taken care of before closing. After a little negotiating (e.g. we found a roofer who was willing to do the work and be paid at closing by the title company so neither of us would have to go out of pocket on the $7,000 expense), the clock ran out and we terminated the contract.

Since our agent and lender work on commission, the only two out of pocket expenses were the inspector ($600) and our option fee ($750).  As of now, I'm feeling good about the real estate tuition. You really pay attention to the lessons when you are about to be on the hook for hundreds of thousands of dollars. What we learned about the home buying process and the local Austin market in the past two weeks greatly outpaced than the last 6 months of reading and podcast listening I've been doing as mental preparation for the jump into real estate.   

Topics include:   

  • property taxes
  • plumbing
  • roofing
  • estimating rehab costs
  • condo regimes
  • making an offer in a seller's market
  • inspections
  • understanding important financial ratios
  • permits
  • contractors
  • getting quotes
  • home insurance
  • home warranties
  • renter contracts
  • apartment leases
  • economic opportunity zones
  • surveys
  • rent rates
  • getting references

I hope to post a little write up on my mini-journey to solidify my learnings and help new local investors with the roller-coaster ride that is getting your first property under contract. 

Thanks again for those who offered their advice on this post and via private messages. It really helped. 

*Is there a name for that?

@Zachary Sexton good call.  It's not worth jumping into a bad deal and dealing with the anxiety and stress that it would cause.  With the number of condos etc. coming online in east austin (and all over austin), it can drastically affect your rental income in the future and send you more in the negative...and who knows what the impact may be from the next recession.  I'd make sure your numbers work and you have a decent cushion in case.

I've personally been focusing on single family . Every once and a while I still see a deal or two that pops up on MLS -- where the numbers work for a great flip. Just be on top of it and know the area in and out. As you know, one block/street over can have a huge impact on price. I would try to capitalize in those areas. If you know the area as well as you should when you're investing, you can also buy without a realtor and use it to try to negotiate further reductions in the price of the house by 3% (what would be buyers agent commission). It can have a decent impact on your future profits, and/or free up some cash flow for the flip.

My wife and I just did a year and a half single family flip in the 04.  I knew our area of the 04 extremely extremely well and have been following sales/the market for a long time.  I'm confident I know our area better than 99%+ of the realtors out here so I listed the house myself and marketed myself .  Sure enough we sold without a realtor (buyer also had no realtor as well).  It was very easy and saved us ~35k in commission fees.  Try to be creative in this market.