Should I buy this house?

Question

Hi all,

I am a fairly new investor. I have two properties, both in Minneapolis. I rent them out, and so far, it has been great. The two properties are condos, which I like because the associations take care of building maintenance.

I came across a home that was purchased in 2004 for 180,000 and is for sale now for 35,000. I want to buy it, rehab it, and turn it into a rental. It is a short sale, and it looks like the place is trashed. I would be willing to spend $15,000 on rehab. I would have a general contractor do the work.

It is a 2 bedroom, one bathroom. The house is 1,268 square feet, and the lot is about 9,500 square feet. Because the lot is so big, and it is a corner lot, that puts annual taxes at 2k.

There is a railroad track behind this home. Year built is 1900, it is old. There is also a 2 car garage that looks in rough shape too.

I estimate that I could rent it out for $950 to $1200.

I would need to finance this though. I could get a mortgage or go through peer to peer lending.

Does this sound like too much of a gamble?

Riley F. · Answer

@Erik Dwyer

I see a couple of potential obstacles on this one:

1) You are probably going to have a tough time negotiating the short sale for $31,000, though I can't say for sure because I don't know the property or the bank that is holding the paper. Thing is, even if the home owner agrees, the bank likely wont.

2) Rehab cost isn't really determined by preference (read: I am willing to put X into the property), it's really driven by what is required to make the property rent ready as dictated by the market that you're in. You really need to sit down, look at properties that are similar to what you're hoping yours looks like when finished, put together a scope of work, and have a couple of contractors bid on it. It may be that they come in at $25k or less, or maybe that they come in at substantially more. My $0.02 is that you don't want to leave a ton of deferred maintenance in the property and start renting it out, because you'll have trouble with tenant quality and costs down the road.

Erik D. · Answer

Hi Kirsten and Moe, thanks for the advice. This is a short sale, so I could offer 31,000. Then, I'd have more money for the rehab. I can also raise that rehab price to $25,000. It's not that the entire house needs to be gutted.

The hardwood floors are still nice, but the walls need to be painted. Maybe a new roof. I'm budgeting for worst case scenario. The reason I say it is trashed is because it looks like the previous tenants left most of their things there. There is lots of garbage in the house.

I checked houses in the neighborhood that have recently been sold. A house that is a little bigger, on a smaller lot, and much nicer, sold for $196,000 in October of 2013.

Moe C. · Answer

I would agree with Kirsten 15k in rehab and your paying a GC sounds a bit low.  I purchase homes in that price range and I do 90% of the work myself and I spend 10-15K.

Kirsten Sitnick · Answer

Hi @Erik Dwyer ! I don't know your market or this house at all, but are you confident in that $15K rehab number? It seems like if that were all that were needed, the bank would have it priced higher, assuming the neighborhood is still in the 180K ballpark. If you really can get it for $40K, and can rent for $1000 a month, that makes sense, but $15K sounds low to me for such an old house that's trashed. It's probably worth your while to have a home inspection contingency so you can pay a contractor to give you a repair estimate. Good luck!

--Kirsten