Dallas, TX · Member since 2016 · 23 posts · 2 votes
Good evening everyone,
I would love your advice. I'm still fairly new into investing, and I have not done any deal yet, but educating myself for the past 7 months reading, studios, videos etc..., and I listen to the podcast and read the forums. There is a lot of great info for beginners. I'm hoping to hear great feedbacks. I want to have my first deal, but I don't want to make any unnecessary mistakes. This is an off market deal someone is trying to offer me, and I would love to hear what you guys think. Thanks!!
3 bed 2 bath 1,732 SqFt
Dallas Tx, 75238
Built 1979
•ARV: $185K
•Estimated repairs: $12K cosmetics, bathroom & kitchen updates, windows
•Asking price: $132K
•Buyer pays all standard closing cost & title costs
•$5K non-refundable Deposit
Rental Property Investor · Louisville, KY · Member since 2015 · 221 posts · 106 votes
9y
First tip is be sure to run your own numbers, don't take the wholesalers word for it.
Assuming the ARV is really $185k (and that's a big assumption) and even if you doubled the repair cost to be $24k(which is probably on the low end) and estimate another $10k in holding costs and other fees....that leaves a possible profit of $19k......but if ARV is off and your rehab goes over budget you could be in trouble.......I would not personally put down 5k non refundable unless I absolutely knew what kind of deal I had. Hope this helps
Johnson City, TN · Member since 2014 · 586 posts · 705 votes
9y
On the surface the numbers look workable. When you are talking about replacing windows and working on baths and a kitchen, 12k can go fast. Are you solid on your repair numbers as well as your sales price?
Rental Property Investor · Louisville, KY · Member since 2015 · 221 posts · 106 votes
9y
First tip is be sure to run your own numbers, don't take the wholesalers word for it.
Assuming the ARV is really $185k (and that's a big assumption) and even if you doubled the repair cost to be $24k(which is probably on the low end) and estimate another $10k in holding costs and other fees....that leaves a possible profit of $19k......but if ARV is off and your rehab goes over budget you could be in trouble.......I would not personally put down 5k non refundable unless I absolutely knew what kind of deal I had. Hope this helps
Dallas, TX · Member since 2016 · 23 posts · 2 votes
9y
Yes for the most part they told me 10-12K, and the Windows there is nothing wrong with the window there was some sort of rust on the corner of it since they never opened that window for 16 years. He said it's still good. The kitchen doesn't need much work. The house is in good condition and ready for rent.
Realtor and Investor · North Hollywood, CA · Member since 2015 · 49 posts · 25 votes
9y
It's important to factor in holding costs which can completely change the numbers. Also make sure your own personal gc walks the property and your realtor run the comps ..
Good luck
Dallas, TX · Member since 2016 · 1k+ posts · 745 votes
9y
My guess is you are being really optimistic with repair costs. Especially if its your fist rehab project. You almost cant walk into a house without spending $20-$30K, and dont forget your carrying costs and transaction costs to buy and sell will probably be around 10%, ie realtor, taxes, recording fees, etc etc.
Do you feel comfortable that you can really get a house updated for $12K? especially for your first project? are you as an example going to change out vanities? tile? flooring probably ? will you need an electrician? or a plumber? Windows will run you about $500/window installed if you are doing new windows. Roof? Foundation?
We just finished up our first project, and it went reasonably smooth and we for the most part got great contractors, but we ran way over on what we thought we would spend. Now I know the next time we do a project, we will be a lot more efficient. But its tough to step into a bathroom and a kitchen for less than $12K.
Send me a dm if you have some specific questions, I think I can give you a basic framework on about what labor costs are going to run,
Dallas, TX · Member since 2016 · 23 posts · 2 votes
9y
David D'Errico yes that does help and I will definitely check for myself, and I know the area and it does go for near that price, but my concern was doing the 70% rule or not and when does the 70% rule come in? Always or only use it sometimes?
Investor · Hendersonville, NC · Member since 2016 · 138 posts · 71 votes
9y
@Matu Ambaye ARV suggests you intend to flip as opposed to holding for rental income. All-in, your cost of acquisition and rehab will be 145K-150K depending on closing costs. Unless you are paying cash, there will also be holding costs attributable to financing. If you finance 120K at 5%, 30yr am, it's $650 per month. If you fix & flip in 6 months, your holding cost is almost 4K. If you're financing with private or hard money, double it. Now, you have to sell it. Commission will be 3-6% of ARV. That's another 5.5K-11K.
Add it all up:
145-150K to acquire and rehab
4-8K holding cost during rehab
5.5-11K to sell
Total costs: 154.5-169K
That means you stand to net somewhere between 16K and 30.5K, assuming all your numbers are accurate and you don't run in to any surprises or delays (and we haven't mentioned Uncle Sam's share).
That seems a little thin to me. Maybe you can turn it quicker, because the rehab is fairly simple. Maybe you have cheaper financing. But this is why you have the 70% Rule. The 70% rule builds in more buffer.
All of that being said, even if you only break even on your first deal, give yourself a big pat on the back, and use what you learned to go find your next deal.
Rental Property Investor · Louisville, KY · Member since 2015 · 221 posts · 106 votes
9y
@Matu Ambaye the 70% rule is a "rule of thumb" meaning it is not a definitive way of running your numbers. It is just a starting point to see if you should even consider looking into a deal more. 185x70% is 129 so by those terms the asking price is already too high, but that's why you have to pin down your ARV and really know your rehab numbers. Also you mentioned above it is ready to rent. Are you flipping this property or renting it? That changes everything
Dallas, TX · Member since 2016 · 23 posts · 2 votes
9y
Nicole C. Thanks and I had a realtor do the comps and the comps does go for that price, and I'm working on the GC to check everything else.
Bart Hedgcock to be honest the rehab price I'm posting what I received from them and I will of course do another round check. This was basically if it's best case scenario and all the numbers check out would this deal be good deal once adding all other fees etc... I been hearing about all the 70% rule all the time but this doesn't fit that role for the asking price.
Dallas, TX · Member since 2016 · 23 posts · 2 votes
9y
Pearce G. Very well stated sir. Off course I don't want to break even or lose money, but I'll be using a hard money, and my main thing is should i always use the 70% rule or does that depend on deal to deal??
My only issue is since this deal doesn't fit in with the 70% rule and it might get very thin if I have unexpected costs and other factors. It has no wiggle room like the 70% rule would.
Another question is some people think since everyone use the 70% rule and its competitive that I need to be aggressive and not offer to low.
Dallas, TX · Member since 2016 · 23 posts · 2 votes
9y
David D'Errico I know it's a starting point to know where to start that's why I was looking for expertise feedback. The offer using the rule is to high so does it necessarily mean its not a good deal when that happens? Or is there considerations depending on basically how accurate the ARV and rehab cost it is??
Sorry, I said its ready for rent, but I only said that because the house is not in bad condition at all my apologies, but it is for rehab and flip.
Your objective is to make a profit on the flip. In order to do that you have to build in a buffer to accommodate all your costs plus a percentage for profit. That is why you need the 70% rule. Your offer price must be low enough to meet your requirements. Does the non refundable $5K deposit have to be paid with your offer?
Investor · Hendersonville, NC · Member since 2016 · 138 posts · 71 votes
9y
Granted, your intent is to flip rather than hold, but what is your prospective buyer's intent? Are you selling to an investor or an owner-occupant?
Do the math as a rental property even if your objective is to flip. Once the property is rehabbed and rented, you can replace the hard money with conventional financing. Holding it as a rental property may be a good backup plan if you can't get the ARV you are expecting. A rented property with good cash flow may be worth more to an investor than it's worth to an owner-occupant.
Also as @David D'Errico said, 70% is a rule of thumb. When your repair cost is small and generally cosmetic, you may not need the same buffer you would need if you were opening walls, re-roofing, bringing up to code, etc.
Dallas, TX · Member since 2016 · 23 posts · 2 votes
9y
John Leavelle yes that's the definitely the goal. I need to make profit of course. The 5K deposit is paid separately in the behemoth l, and if I close on the deal it goes towards it.
Investor · Brenham, TX · Member since 2016 · 3 posts · 0 votes
9y
As others have stated previously, $12k seems to be very optimistic.
The 70% rule is a good rule of thumb, but IS NOT set in stone. My partner and I are currently doing a house that we purchased for $95K with an ARV of $295K. We are $85K in and have another $30k in rehab costs to go.
Your first objective should be to find a GC with a good reputation that is reasonable priced (much easier said than done). Have him bid the job, I would not be surprised if the $12K turns out to be $24-30K.
Breaking even on your first deal wouldn't be the end of the world, you will learn a lot. But going into the deal basing all your numbers on best case scenarios will more often than not lose you money. There are unforeseen problems on every plan and they cost adds up rapidly. Work your numbers for the worst case scenario and if they still make sense, do it.
Dallas, TX · Member since 2016 · 23 posts · 2 votes
9y
Pearce G. My main intent is to sell it to an owner occupant, but since this might be my first deal I don't know much about how the rental side would work? How would I pay the money back if I rent out my first deal? I don't have much cash at all and I'm trying to use a hard money to fund my first deal.
with that being said once I'm done with the rehab, and I'm unable to find a buyer for 6 months or longer what would be the best way to go? Do a conventional loan myself or what other options would I have?
Dallas, TX · Member since 2016 · 23 posts · 2 votes
9y
Sam Lawhon thanks for the feedback, and your absolutely right, and all the feedback been great. I will look deeper into how much it will cost, and go from there. The 12K was based on the house being in great condition but I'm sure a good GC will find other issues that might add up very quickly.
Investor · Hendersonville, NC · Member since 2016 · 138 posts · 71 votes
9y
@Matu Ambaye Once you rent it out, you may be able to re-finance it with a conventional loan which would be far less expensive than hard money. You would use the re-fi to pay off the hard money loan. Then use the rental income to service the conventional loan. But crunch your numbers and talk to some lenders in advance. I can't stress that enough. You want to make sure the property will generate enough rental income to service the loan and the other expenses of ownership. Plus, there's no guarantee you will qualify for a conventional loan at all.
If renting the property is an alternative exit to flipping it (and you should ALWAYS have at least one other exit possibility), then you need to read up on and listen to some podcasts about the BRRRR strategy.
Please don't take this the wrong way, because I applaud you for asking all these questions, but I think you might need to find a local mentor or partner for this first deal. Maybe you contribute sweat equity on the rehab in return for a modest finder's fee and the opportunity to learn. Maybe a mentor or partner will help you find a deal that has more room for error. I'm just worried about you getting stuck with a hard money loan on a property you can't flip or re-finance. What happens if the rehab costs more than you expect? Can you borrow more from the hard money lender? Or do you have to stop the rehab before it's finished? What if you have to sell for less than you owe the hard money lender?
Dallas, TX · Member since 2016 · 23 posts · 2 votes
9y
Pearce G. You are on point sir!! Those are some of my concerns and i have a mentor I'm learning from as well, but I also like the idea of hearing feedbacks from others that has the successful background at what they do in real estate investing. I will look into the exit strategies as you mentioned as well.
I'm not sure at all about the rent side of the business to be honest with you. I only been educating myself on the buy, rehab and flip side of investing for the most part until I complete my first deal. I think being in the buy hold and rent is another ball game for a beginner.
I'm not sure what all the requirements are for the conventional loan to get out of the harmony loan. I will educate myself more as I go. I'm sure you know there's to much to know in investing and can't learn them all.
Dallas, TX · Member since 2016 · 1k+ posts · 745 votes
9y
@Matu Ambaye May I suggest that be prepared for either. I suspect most people who flip houses over an extended period of time have ended up with a rental, or vice versa, I bet most people who want to buy and hold end up doing some form of flipping/major rehab at one point or another.
Having just completed my first rehab, with relatively little experience in the construction trades, flipping is much harder and much more hands on than being just a landlord. You will want to have a stable of contractors that will do work for you. You might find it easier to do a few small rehab jobs on a rental property to see how you like running a rehab project. The risk is a lot less imo.
Contractor · Dallas, TX · Member since 2015 · 8 posts · 1 vote
9y
Mat...I am a GC here in Dallas working with investors who fix and flip. I understand where pricing needs to be for investors and price accordingly. I'd be happy to take a look for you and give you my opinion on what the property needs. I can bring you by a current property we're currently rehabbing here in Dallas,