Good Rehab value but high cash investment + negative cash flow

7 Replies

1st investment on a Foreclosure of a 1 detached home in a 8 house complex in Santa Ana, Southern California, 2000sqft (larger than average for popular Southern California), built 1994, 4bd/3bt, very convenient to multiple markets, stores, one of the best I've seen, 70% Mexician population, B neighborhood.  Listed for $440K , will try for $405K bid: add $35K rehab (got quote already from 2 contractors who toured the house w/ me so I'm quite sure of the cost) + $5K closing brings it to $445K all in. The conservative comps are $525K for similar homes not rehabbed in the area.  So the instant post rehabbed value is a healthy $85K.   I need to bring $115K cash (down, rehab, etc) to bring this property to rent condition.

 

 $1800 monthly mortgage + $900 expense (tax, $200HOA, insur, vacancy, 8% mgmt, etc) = $2800 above average expenses.  Rent will likely be $2600 = operating -$200 monthly.  

Concerns:

- 2 months rehab + 3 months to rent = 5 months x $2800 = $14K

- $14K + $115K cash already put in = $129K , I have $145K in savings so 88% of all my money to operate at a loss. 

- selling after 1 year (6% sell commission, 15% tax, etc) will reduce $85k added equity to about $15K profits.

Is the big increase in home value worth the risk of so much of my funds?  

Does the after rehab value large enough to accept the high initial investment & negative monthly cash flow? 

There is never a good reason to have negative cash flow.  Why would you lose money on purpose.  This isn't a rental house...it's a flip house.  Take the money and go onto your next deal.

Also, you're counting on all going well with your rehab...which it never does.  There will always be cost overruns, so your bottom number of profit will be eaten away by it.  One of them is the cost to carry the property while you are rehabbing it.  You've already accounted for 2 months of rehab at $2800/month.  When those cost overruns kick in, and they will, they will also stretch out your timeline...and add extra carrying costs per month...on top of those extra cost overruns.

I would be concerned about buying the biggest house in the area.  That isn't as good a thing like it might sound.  Quite often, that's like going to a Ford dealership to buy a car, and finding a Mercedes there.  The Mercedes looks great, but it costs more than what you were budgeted for, and not what you were looking for.  You will however take it, if the dealership will sell it to you at the cost of a Ford.  This is what you likely will encounter.  The bigger house won't get you the bigger flip price.  You will get buyers for it at the highest price of the smaller houses though.

Also, since this is part of a specific complex ("...1 detached home in a 8 house complex..."), your comps will be the other 7 homes in that complex...and not the other homes in the area ("...comps are $525K for similar homes not rehabbed in the area....").  This is a very refined micro-market.

Love how@Joe Villeneuve : made his approach at looking at my potential investment. I was bringing in my rental expectations into a deal that is likely a flip. You're right that the numbers do favor capitalizing on the early equity growth and not the long multi-year rental play. 

I am on the fence about comparing comps strictly to the units inside the complex. Although I admit it's the only true way but doesn't most comparables done in an area wider than a few houses from the listing property? It's customary to measure against sales several blocks or even miles away? Looks like its way too strict perimeters to say appraising is only done against the properties next door or in eye sight.
After 36 hours of my post, I am concluding this is a very viable prospect for my 1st investment.  Not to worry, I've been running, rerunning numbers, scenarios ***Thanks for reminding me build cost over runs!***

I'll keep taking any evaluations and always thank those that open my eyes and kick me to wake up! Laugh. Thanks Joe V.

About buying the biggest/or bigger houses in the neighborhood, it wasn't my intention however this foreclosure has been on the market for almost 3 months, the value vs investment produces great & fast equity.  

When I remove my financial situation, opinions, wants, budget, personal basises as much as possible, the equations reveal positive value that I haven't been close to getting with my other research & investment hunting.  I hope it's wise to say " If my bank account was 200% what it is now, would this be a good deal not to pass"?  I think it is a good deal.  

"...buying the biggest/or bigger houses in the neighborhood, it wasn't my intention..."

It doesn't matter if you intended to buy the biggest...

"...this foreclosure has been on the market for almost 3 months,..."

That doesn't automatically make it a good deal.  Could be quite the opposite.  Maybe it's been on the market so long because it isn't a good deal.

"...the value vs investment produces great & fast equity."

No it doesn't.  It does only if you turn the facts around to fit your needs. 

"When I remove my financial situation, opinions, wants, budget, personal basises as much as possible,..." 

You can't remove those things.  They are a part of it...and will always be a part of it.  Using your same "logic" then, if I removed the "Horn section, the sheet music, all the "G flats", and the key signature, a particular song would sound great...".

"If my bank account was 200% what it is now..."

Is you bank account 200% of what it is now?  Why would that matter anyway? You're rationalizing a bad deal into a good one.  Rationalization is a very expensive word. 

"would this be a good deal not to pass"? I think it is a good deal."

No.  This isn't a good deal.  Sometimes the best deals you make, are the ones you walk away from.

Originally posted by @Drew Leo :
Love [email protected] Villeneuve: made his approach at looking at my potential investment. I was bringing in my rental expectations into a deal that is likely a flip. You're right that the numbers do favor capitalizing on the early equity growth and not the long multi-year rental play. 

I am on the fence about comparing comps strictly to the units inside the complex. Although I admit it's the only true way but doesn't most comparables done in an area wider than a few houses from the listing property? It's customary to measure against sales several blocks or even miles away? Looks like its way too strict perimeters to say appraising is only done against the properties next door or in eye sight.
After 36 hours of my post, I am concluding this is a very viable prospect for my 1st investment.  Not to worry, I've been running, rerunning numbers, scenarios ***Thanks for reminding me build cost over runs!***

I'll keep taking any evaluations and always thank those that open my eyes and kick me to wake up! Laugh. Thanks Joe V.

you can't adjust the source of the comps, or use comps to fit your needs.  Simple facts:  your comps are going to be very heavy (VERY heavy), coming from the exact units....because they are "exact units".  Comps are used, and the criteria for the comps used, is always based on getting those comps as close to the same property as the one you are analyzing.  You can't get much closer than an exact unit...and when you have 7 of them right next door, those 7 will overshadow any other comps.

Nice Joe.  I owe you for the words of wisedom and I should be clear minded to evaluate w/ science when it is necessary and apply my situation to the deal. Walking away is 100% money in the bank.  Now change your photo and smile. 

Originally posted by @Drew Leo :

Nice Joe.  I owe you for the words of wisedom and I should be clear minded to evaluate w/ science when it is necessary and apply my situation to the deal. Walking away is 100% money in the bank.  Now change your photo and smile. 

LOL. You are not the only REI that attempted to go down this path...and won't be the last.

Keep this in mind at all times: 

It's a numbers game.  The numbers that matter are the ones with "$$$" in front, not "street names" behind.  The goal is to get "deals"...not "properties".

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