To add on or not to add on....

[Christopher Blanco]

I have a property in Euclid, OH that I have a lead on through my probate mailing. The property is in a decent area, but is only a 2/1 and 650 sq ft. I can get the property as is for around $18K-$20K, put about $10K into it and turn around and rent it for $775. Using my calculator that gives me a payback of 5 years and a cash flow of about 470 a month. Not bad...but the ARV will only remain in the 35-40K range.

However if I add on to make it a 3/2, and do a full rehab (35K total) I can bump the rent up to $995 a month, cash flow at $560 a month. ARV goes up $80-$90K. Payback is 7 years however

So in the first deal, the payback is quicker but the over all value of the deal is less and the 2 bedroom house insures my next buyer is an investor. Converting it to a 3/2 almost doubles the value of the deal, converts it to a home a home owner would buy, but with a longer payback though.

Any advice or thoughts?

[Chris T.]

@Christopher Blanco

I would find out the majority of the houses in that area, if they're a 2/1 or 3/2. If most of them are 2/1, i would probably leave it alone.

But if they're mostly 3/2, then your unit would be at a disadvantage, and you should lean towards adding on. And you would have more options when exiting this property. 

I would also double check that $35K rehab as well. If it's a 3/2 650 sq ft house, it will seem very cozy. But If you build an additional, that rehab costs seem low.