I have the following deal outside in the suburbs of Bucks County that I am considering... please let me know if you think this is worth it.
Subject Property - $105,000 (cash)
Renovation - $70,000 (cash)
After Repair Value - $260,000 - $275,000 (could be more depending upon the finishes)
Here is where it gets tricky...
- Holding Period: 1 Year
- Renovation Time Frame: 3 - 4 Months
I would buy this property under the FNMA guidelines of the First Look Initiative which allows Owner Occupants the first "stab" at purchasing the property before Investors.
I will indeed live in the property and own it for 1 year before I 'flip' it, so I would not be in violations of the First Look guidelines.
Is the above deal still worth it given I have to wait 12 months before it can be sold?
well if you can realistically make 90-100k in one year after repairs that's pretty good salary if u ask me. So is your plan to move every 12 months or so? My advice would be to do this then buy a duplex live in half rent half and you will be able to finance your deals and not have to move every year
Well, Ken.. it's not as simple as 90 - 100k in profit. To get the property in cash, I essentially have to borrow the funds from my father and borrow the renovation funds from my father. He also wants to be apart of the deal. I would split profit with him 50/50.
House Sells: $260,000
Less Profit: $47,000 (or 23,500 for me)
Less Cost of Purchase: - $5,981 (I have to pay both sides of the transfer tax and other closing costs)
Less Cost of Repair: -$67,500
Less Carry Costs: - -$11,438 (Taxes, Insurance, Utilities, and Interest on Inter-Family Loan)
Less Cost of Sale: - $23,400 (6% Commission and Transfer Tax)
That Leaves me Roughly with a Purchase Price of $105,000
If I sold it for $275,000 it would turn my profit into $60,500 roughly (or 30,250) for me
What do we think now?
If this is the only way you can get your first flip done then I would say go for it but I would like you to visit a lawyer and have everything written down for your agreement with your father. Meaning what you both want out of the deal, what you will both be making in the deal and what you each are responsible for if there are extra cost or even a loss.
Will there be a LLC formed, What will the percentages will be. ETC ETC
I know he is your father and I'm sure if he is willing to put up $175,000 in cash that there is a great trust and relationship there. Lets keep it that way, go see the lawyer.
That is great advice. My father actually loaned me money in the same manner to complete my first rental property deal (he received nothing from the deal). He did not want anything out of this deal either, but I insisted because of what he did for me the first time around. I paid him back with a cash-out refinance. This time I will live in the property and cover the expenses until it can be sold.
I will reach out to an attorney and see what we can put together. As for the LLC, we won't be doing that because I have to buy the property under my own name to qualify for the First Look Initative from FNMA.
are you actually looking for a primary residence, or is this just something you are willing to do to make the deal work?
If you actually want/need a primary residence, the deal looks great in my opinion. A lot of the holding costs you outline can be considered a normal part of living, and not exclusive to this investment (if you own ANY home, you'll have taxes/insurance/etc.).
If you don't really want/need a primary residence, then it's a tougher call. You could wait for the first look period to expire and then submit a true investor bid. Of course this opens you up to potentially losing the deal to other investors who are also likely waiting to bid.
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