Upper/Lower duplex in Wausau, Wisconsin. 1910 square feet, lower is 3 bed/1 bath, upper is 2 bed/1 bath. Built in 1900. Lower is currently rented for $550/month, upper is vacant. Neighborhood is borderline (literally); there are nice homes about two blocks in one direction, and a not-so-great part of town two blocks in the other direction. One thing I really like about this property is that it is by far the ugliest property on the block; the houses near it are well-taken care of, and several have been re-habilitated.
List price: 40,000.
--new flooring through most of the building.
--New cabinets in both kitchens.
--Some wall repair in the lower unit. (minor)
--New paint in several rooms.
--Half of the roof is in good condition; the back half has some storm damage and needs some repairs soon; probably need to replace the back half within a year.
--Paint on the siding is old and peeling; since it's lead-based, it would be best to strip it all off and do vinyl.
--New siding will cost about $4,000 ($12,000 installed). I can do most of this myself, however.
--Interior rehab will run about $3000 per unit (again, doing most of the work myself).
--Roof is quite high and steep; I could do some of the tear off, but I want a professional to install it correctly. $15,000 (for the entire roof; not just back half)
--Fixed up, the upper unit could rent for $600/month.
--Fixed up, the lower unit might be able to bring $650/month.
--Fixed up, the unit will appraise for 70-75k (this is based off of info from the seller; I need independent verification).
So, to BURRR this property, I cannot spend more than 56k. I'm estimating 27k in repairs, which means my max offer should be 29k. However, it's an old house, and I feel like there is potential for more issues in the near future; old heaters, water heaters and wiring. Does 20k seems like a reasonable max offer? That gives me some wiggle room.
--I don't have the cash for this project. So I'll need to get creative. If the owner/realtor (same guy) are willing to do a 18-month note with interest-only payments, I could leverage my excellent credit to do the rehab using 0% interest credit cards. That would give me 12-18 months to complete the project and re-fi the property. The other option is to find a private lender who would invest in the project.
--Winter is coming, and my brother-in-law, who is a locale contractor, does not have time for this work until next spring. My idea is to pay someone to patch the roof where it needs it, forget the siding, and rehab the upper unit as quickly as I can, so I can get a tenant inside. At that point, I'll have a cashflowing property through the winter; all cashflow would be saved towards additional unexpected expenses. Come spring, I re-roof, re-side and rehab the lower unit. Hopefully I could get the re-fi done by early next summer.
--The lower tenant is on Section-8. I know very little about this; can anyone point me towards resources relating to this? I know that some landlords love it, and others won't touch it; why?
What other questions would you want to have answered before you made a decision on this property? Given the information I've given you, would you make an offer or back away? What do you think my maximum offer should be?
Lots to chew on in your post. Here are some of my thoughts.
Be careful about assuming that you can do the work yourself. This much work is going to require building permits, and most of it will require a "Dwelling Contractor License" from the State of Wisconsin. In addition, the City of Wausau is pretty restrictive on what non-occupant owners are allowed to do, which isn't very much. If you need to change a faucet, they allow that level of effort, but not much more. The City inspectors are known for driving around the city looking for dumpsters. If a dumpster is located where a permit has not been issued, a citation usually follows.
I'm not sure that I would scrape the existing exterior lead-based paint. That can be extremely expensive, especially since the City will not allow you to do this yourself. I would just put the new vinyl siding directly over the old siding. You might want to considering adding a layer of foam insulation before putting on the new siding.
Be careful about the roof tearoff schedule. The local waste haulers are unbelievably swamped right now. We just finished a roof in late July, and it took them 3-4 weeks to even come pick up the roll-off box. That was Advanced Disposal, and they are not even scheduling orders for roll-off boxes right now. Also, make sure you know how many layers of shingle and/or cedar shake that is on the house. Houses from that era with the 12/12 pitched roofs often have the original cedar shake followed by 1-3 layers of shingles. You wouldn't even think that this is possible, but we did a steep roof that had just that. Much larger than normal tear-off and disposal effort/cost. I do have a suggestion for a roofing contractor if you would like it.
If the electrical has not been updated, it is likely that the main service is 100 amp, which equates to a maximum of 60 amps per unit. This is really a low end setup for electrical these days with the amount of electrical demand of most units/residents. You might want to get a 200 amp service brought in with two meters, essentially giving each unit 100 amps. Depending on what needs to be done, that can cost 2,500 to 5,000. While the upper unit is being rehabbed, you might want to consider rewiring that unit at that time.
The ARV that was given to you ($70-75k) is probably about right for this type of place, but is highly dependent on the rental market.
If you can get the place for 20k, it is probably worth it; however, I'm not sure that this seller will likely want to drop the price by 50% if you need him to provide the financing, unless the interest rate was 12-15% plus points.
Section 8 is a federal program through HUD that offers "housing vouchers" to low income people. Both the tenant and the house/apartment need to be inspected/certified by HUD. HUD then pays a portion of the rent and the tenant pays a portion. There is all kinds of information on this program both on BP and at www.hud.gov. In general it is a decent program. The tenants that we have on Section 8 are pretty decent. Once a tenant gets a voucher, they can move and the voucher goes with them. This is great because they are motivated to pay rent due to the risk of losing the voucher if they get evicted, as long as you enforce your payment/late fee policy.
Would love to get together for lunch sometime when you have time. I work in Stevens Point and live in the Wausau area.
I just had a property re-roofed that had 3 layers of shingles and shake. It was 20k for tear-off, resheet and re-shingle with 50 year shingles so know your numbers because it won't take much to quickly go over budget on older houses.
Financially you are not yet ready to start investing. I would advise you hold off and keep saving until you can do all cash deals in that price range.
@Mark Strobel , thanks for the input. Fortunately, my brother-in-law is a contractor based in Athens (he also owns 9 units in Colby and Stratford), and my father-in-law owns a roofing company, so I have access to good information about permits and construction costs. I've spent probably 3 hours already discussing this property with my brother-in-law, and we have walked through it together as well.
I think I must not have been clear about the external paint; the plan is to tear off the old siding and replace it with vinyl. It's also good to know what you said about garbage haul-off. We are planning on doing the roofing project next spring, so that should give us time to get on their schedule. Fortunately, the roof is in decent shape except for the places that some shingles have been ripped off by the wind, so I think a patch-up job should last through the winter. I am curious who you would suggest for a roofing contractor, btw.
I'd love to meet up and talk RE at some point as well. I'll message you my number.
@Samantha Klein Thanks for the input as well. Fortunately for me, I'm young and willing to work hard. I've spoken with a contractor about doing part of the work myself (mostly the tear off) and have included those numbers in my calculations.
@Thomas S. You might be right. Perhaps the best way to do this would be to try re-habs in a higher price range, where there is more margin for error. But if I see a way to make this work, while still being very conservative with my estimates, then I feel like it's a reasonable risk.
Well, I offered 20k on this property several weeks ago. The owner immediately countered with 30k, calling it his final and lowest offer. I told him I could do 22.5k; he didn't respond and the conversation died. A few weeks later I emailed him and said, "I can see that you aren't interested in my offer; keep me in mind if your situation changes." He responded with an offer of 28k. I reiterated my 22.5k offer. He dropped to 25k, I ran through the numbers again, and agreed to it.
So, I've raised 10k from private lenders (family), and my father-in-law has introduced me to a local bank that is real-estate investor friendly. With the 10k down payment, I'm getting a 40k loan with interest only for 1 year and then a 20 year amortization after that. I put earnest money down and signed the purchase agreement today. I've got contingencies for inspection and financing in the contract, so I can get out if the loan falls through or if more thorough inspection reveals something I don't know about. We close Nov 13th.
I'm scared shitless, and extremely excited. I work remotely, so my plan once we close I'm planning on just taking my job to the property and working from the empty upper unit. Work is kinda slow right now, so any time I don't have work to do I can just go off the clock and work on rehabing. I want to get it rehabed and rented before Christmas...but I'm not sure how practical that is. We'll see.