Am I over improving?

13 Replies

I'm closing on my 3rd property, a 1600 sq ft SFH built in 1975. The numbers originally looked great for the growing Charleston SC market, but my repair costs are quickly adding up. Since it is not earning much as a flip, my plan is to rent it for a few years, take the tax break, hope for some appreciation, then sell. The house is in what I'd classify as a B neighborhood consisting of good schools and nicer older homes. The biggest competition after rehab will be new construction developments. Here are my projected numbers

Purchase price: 135k

Renovation budget: 40k (currently)

ARV: 208k

Do any of the following improvements seem extraneous?

1) Scrape popcorn: $2500

2) Add a tankless hot water heater: $2500 (opens closet in house and resolves code issues with existing tank)

3) Pergo XP flooring through all house besides bathrooms.  $5,000 (could go with cheaper laminant and save $1,500)

4) Gut the two small bathrooms $7,000 (Replace bisque jetted bath tub with white standard tub, reframe leaky tile shower, replace vanities/ toilets.)

5) resurface kitchen cabinet doors $1,600

6) granite counter top ~$3,000

7) Remove structural wall separating living rooms $2,000

8) GE appliances $2,200

There is other work to be done (HVAC, foundation, paint etc.) but items above are the ones with potential for cost savings. 

@John Vietmeyer Just doing a quick analysis of your numbers, you are right, your profit for a flip is going to be thin. Couple if questions, what does your financing look like i.e. all cash or hard money? How accurate is the ARV? Is that based on an appraisal with your improvements factored in?

I ask because depending on your financing you may be stuck with those improvements in order to get to that ARV. Personally I wouldn't do some of those improvements because the property will be a rental i.e. no granite countertops, wouldn't remove wall, go with cheaper laminate floor. I would save that money in order to make it a better deal for you and go with nice but cheaper improvements. Without knowing what other rentals look like in your market, personally I think you could be over improving the property.

good questions. I comfortable that the ARV number. There is another house on the street that is pending and hope that will drive it up a bit.

I received a 1 year interest only portfolio loan from my bank with 20% down, $150 orgionation at prime plus 1.5% (~4.5%). My plan is to refinance to 5 year arm or 30 fix once the renovations are complete.  

Not understanding the tankless hot water heater cost. First, why do you need to do it, and second, why is it so much? My buddy just put one in and total material for piping and the unit was maybe $400. They really are simple units.

I would take care of vitals before you hit the popcorn ceiling and granite as well. While those are important for the modern look a finished house is a far better situation. I see some builders having success mixing granite and laminate to reduce costs. Interesting concept. I don't love it but it works to sell the house.

How big are your bathrooms? You can make a nice bathroom for material cost of $1500. I understand there is labor so I don't think your budget is outrageous for 2 but taking on some projects yourself to save some money and save the deal is necessary some times.

Show some pics if you could of before and where your at now.

@John Vietmeyer we have bought, rehabbed and sold 25 houses in Charleston. I don't want to comment publicly, since we are working in the same town, but I could certainly give you some guidance that would double your profit on this rehab/flip. My phone number is in my BP profile and you are welcome to call me next week during business offers. 

@John Vietmeyer We did many unnecessary improvements on our first few rehabs. For example, we replaced perfectly good windows in our first few "just because". This added thousands of dollars to the cost of each project as well as adding 2-3 weeks to the renovation (more holding costs). After we began repairing and repainting the existing windows, we found that our buyers either didn't care or were excited about the "original" wood windows. We also found that we needed to upgrade the flooring we used in the beginning, because buyers were calling us back with failures. Currently, we put laminate countertops in all our rehabs with ARV under $200k and granite in the properties with ARV over $200k. So far, our buyers are accepting this offering, but time will tell. I find it very valuable to listen to our buyer feedback and suggestions from other rehabber/flippers in our local market.

We all learn from experience, but I like it best when I can learn from the experience of others!   

@John Vietmeyer

It all depends on your location and other comparable homes. As far as pergo......... I very much dislike it. We put it in our properties, and water damage happens very easily with bubbling and it looks terrible quickly. Tenants don't take good care of paper go typicallly. Engineered hardwood goes a lot farther in my opinion. 

You can cash out refinance after 6 months on appraised value. 

John, if you are going to rent it out, does it makes sense to rehab it so nicely? My main concern with your strategy is that if you rent it out, and it gets trashed, you gotta throw more money at it (which I think you will have to after renting it out even if it isn't trashed) when you want to sell it in a year's time, but you will be back at square one. 

Your numbers seem quite high, are you arm chairing everything? I think granite is overkill for a rental, keep in mind a lot of the stuff you put in will be trashed in a few years and will need to be replaces again when you go to sell it. Just my 2 cents I am working on flip #15, I don't know it all, but have learned a few things.

Although your repair estimate is at its high end I don't think that's your issue. I think your purchase price is high. If your ARV is correct at 208 your numbers should look like this.

Purchase 50-60% depending on condition of house. 104k  - 120k

Repair money 10% - 20% of ARV

Total 60-70% of ARV Invested

Your best deal would be Purchase 50% Repair 10% Your worst deal is 60/10 or 50/20

Never do 60/20

If you have 40k in repairs (20%) you need to buy at 50% 104K

This would have left you all in at 144k. Much better position.

You make your money on the purchase never on the sale...

Understand, probably should have kept looking for a better investment but at this point I'm in it for the learning.  keeping the property basic, I think I can keep my renovations to $25k. 

Here are a few pics:

135k seems like a good deal for this city. Where is it located with good schools? If you are going to rent it out do the bare minimum and rent it. 3/2 in james island or west ashley should rent for 1300-1500 before renovations and not much more then that after the reno right? So fix the leaky bathroom shower, clean it up and rent it out, then when you are ready to flip it in a couple years you can do the granite and floors.

Like Russ and some of the other guys said.  First you need to decide if renting or selling because that dictates your rehab. Renting rehab is much cheaper than flipping rehab.  Speaking as s a Realtor you will not have a hard time selling it if you go that route and here are the numbers to prove that.  As of December for James Island you have houses sitting on the market for 52 days and it has been as low as 9 days at a certain point this past year.  Crazy right.  Supply of houses is 1.4 months which is the lowest it has been in the last 5 five years!!  So you can see what I mean.  To put it another way we have a housing shortage going on right now!  Buyers are lining up down the block and foaming at the mouth to purchase homes.  Throw out some cardboard boxes on the curb you may get multiple offers to buy em ;)  I CAN'T SAY THIS LOUD ENOUGH 2016 WILL BE A STELLAR YEAR TO SALE IF YOU ARE THINKING OF CASHING IN SOME INVENTORY GUYS!

Ok that is all the yelling I will do lol.  If selling go look at other houses in the neighborhood and see what they look like.  I would look at getting another granite estimate or a cheaper granite because if that is for just the kitchen it is crazy high.  I can give you tips on lowering it to about half that.  For popcorn ceilings check out a ceiling sander such as Porter Cable 7800 or one of the others on Amazon and do it yourself much cheaper.  Flooring I would look at the really thick high quality laminate planks (you can find on sale too for cheap) and most people will not be able to tell the difference between that and hardwood.  You can save money on HVAC too by buying online (I grew up in this business so know some tricks lol).  That is just few tips off the top of my head.  Your bathroom budget sounds a little high too but hard to say without knowing what is involved.

If renting fresh paint is your best friend of course.  Personally I am doing away with carpet in mine in the future and going with the tile and thicker laminate planks just not in areas prone to get wet.   I wouldn't do granite.  Trust me tenants will chip or crack it or take a jack hammer to it lol. Whole house tankless water heater is a no go if you can avoid it IMO (unless you like getting calls all the time because it doesn't get hot enough or water flow isn't enough).  Trust me I am dealing this one right now.  Ditch the ceiling fans too unless you don't mind fixing or replacing some after every tenant.  I can tell you a bunch of other tips too on renting if interested.  When renting time is money.  Less time you spend having to come fix stuff down the road the better off you will be in the wallet and also have more time to fish or hit the beach.  Good luck brother and let us know how it goes.  My number is in my profile if you need any help.

Have an amazing day!

Scott H

Not sure what the ceilings look like, but when I bought my house, it had 'popcorn' ceilings.  From what I remember, they were a little different than the popcorn ceilings that I was used to but I cant remember exactly what the difference was.  Either way, we just scraped them with a wide spackle knife.  It didnt take more than an hour.  The ceiling wasnt flat, it just had a texture look that was barely noticeable.  We painted over it and that was that.  It costed us paint and 2 hours of our time.