Help me understand why this is a good deal

19 Replies

Purchase price: 175K

Rehab: 150K

ARV: 450K (conservative; median prices in the area are closer to 485K)

125K spread looks great, right? I think so, but then I think about the cash I have to put in, which is probably around 50K to close the loan and hold the property for 3-4 months (contractor's estimate). 

So...let's say we get list price almost immediately (otherwise known as best-case scenario), everything on the surface looks good until you realize that you have to pay taxes on the profits (bye bye, 25K), closing costs on the property (let's estimate 12,500), RE commission (6K). 

Right there is almost 35K, so now you have 90K. But then you take the 50K you borrowed from yourself and you're left with 40K. 

Would you jump at this? What would you be trying to get out of this deal? I'm asking because I'll be liquidating retirement accounts to try and make this deal happen, so it's pretty important that it work out. 

80% return on money sounds great, but I'm also of the mindset that risking 50 to make 40 isn't always the way to go. 

Anyone want to make me feel dumb for even questioning this deal? (That's what I'm really looking for, haha)

Hey Cosmo,

I would say this is just an OK deal.  Its not a home run, but its not a crap deal either.  I wouldn't worry too much about the taxes that you pay.  on a per deal basis.  This is why getting an entity set up is so important.  You will roll those profits into the next deal and your taxable amount could be reduced IF the money is working for you.  

Maybe a mindset shift is necessary as well.  Every year i have to write a fat tax check, its because i have an even fatter bank account.  i work hard to reduce my taxable income as much as possible but at the same time i love writing fat tax checks!

I think your commission number is low and closing cost number is high.

Maybe for a first deal (im assuming here) this may not be the best deal.  FInd one that is closer to 75% of all in cost and requires a smaller rehab.  Big jobs eat money and create more opportunity to take a loss on the project.

Good luck!

Originally posted by @Brent Coombs :

@Cosmo Iannopollo , how else will you make 80% (net) ROI with $50k over the next year?

 Nothing like taking the over complicated and simplify it.  This is the perfect answer.

@Cosmo Iannopollo I can make it sound even worse.... closing costs will probably be $35k, and income taxes will be closer to $40k.

> Would you jump at this? What would you be trying to get out of this deal? I'm asking because I'll be liquidating retirement accounts to try and make this deal happen, so it's pretty important that it work out.

So you don't really believe in the deal, but you're going to liquidate your retirement accounts to make it happen, so you want us to tell you that it's a good deal, even though you don't believe that yourself based on your own numbers?

It's not the worst deal in the world but I wouldn't even think about making any kind of investment with that mindset.

Let's look at this from a different angle: IF you converted your IRA to self-directed, and put the deal in there, you could minimize your tax hit. (I am a real estate broker, not an accountant or tax attorney, so check with them--however I have successfully used this strategy myself several times.)

Good feedback. 

@Sam Barrow I know it may seem like I don't really believe in the deal but I do. It's more of trying to think it through to its most logical conclusion and then gaining insight within that process. This is the first time I've ever considered anything like this so the hesitation is more from wanting to go in with my eyes completely open. I'd say it's a cautious optimism with a deal that I think is good enough to use retirement funds on. Make sense?

Do a better analysis think through the cost, interest too general.

One thing I don't follow in your post is your $50k in closing/holding costs. If you are using your own money (retirement accounts) to fund this, I don't get where you get these costs. Can you elaborate on what you're doing here? 

@Cosmo Iannopollo I think you are double counting your $50k "you borrowed from yourself".  If the purchase price is $175k and the rehab is $150k, then the total cost (less holding and closing costs) would be $325k.  This should include you down payment/costs to close the loan. Unless there is something different, sounds like your project income is in the 90k range (after income taxes).  

I do agree that some of your costs (like taxes and closing cost) sound low.

Cosmo,

If you really are unsure, and want to see if this is a REALLY good deal, after you have an assignable contract, try wholesaling it and see the responses you get.  If others are ready to pull the trigger, it should settle your questions (and nerves).  If not much response, maybe it's not the deal you might wish it was.

Originally posted by @Sam Craven :

Hey Cosmo,

I would say this is just an OK deal.  Its not a home run, but its not a crap deal either.  I wouldn't worry too much about the taxes that you pay.  on a per deal basis.  This is why getting an entity set up is so important.  You will roll those profits into the next deal and your taxable amount could be reduced IF the money is working for you.  

Maybe a mindset shift is necessary as well.  Every year i have to write a fat tax check, its because i have an even fatter bank account.  i work hard to reduce my taxable income as much as possible but at the same time i love writing fat tax checks!

I think your commission number is low and closing cost number is high.

Maybe for a first deal (im assuming here) this may not be the best deal.  FInd one that is closer to 75% of all in cost and requires a smaller rehab.  Big jobs eat money and create more opportunity to take a loss on the project.

Good luck!

 Could you elaborate on the part in bold please?

Originally posted by @Effram Barrett :
Originally posted by @Sam Craven:

Hey Cosmo,

I would say this is just an OK deal.  Its not a home run, but its not a crap deal either.  I wouldn't worry too much about the taxes that you pay.  on a per deal basis.  This is why getting an entity set up is so important.  You will roll those profits into the next deal and your taxable amount could be reduced IF the money is working for you.  

Maybe a mindset shift is necessary as well.  Every year i have to write a fat tax check, its because i have an even fatter bank account.  i work hard to reduce my taxable income as much as possible but at the same time i love writing fat tax checks!

I think your commission number is low and closing cost number is high.

Maybe for a first deal (im assuming here) this may not be the best deal.  FInd one that is closer to 75% of all in cost and requires a smaller rehab.  Big jobs eat money and create more opportunity to take a loss on the project.

Good luck!

 Could you elaborate on the part in bold please?

 Profits from one flip if you continue to do more business will be rolled into the next project.

@Cosmo Iannopollo So some of this is about what you want out of real estate, so maybe ask yourself:

a.) Risking $50K to make $40K...would you rather use $50K to get into a 10% cash-on-cash deal and make $5K/year?  It would take you 8 years to make that $40K.  

b.) Do you have the cushion to take on the deal? Let's assume your ARV is conservative but Rehab costs you $175K instead of $150K, can you complete the project? What if it takes you 6 months instead of 4 months?

c.) What's the opportunity cost of the $50K that you borrowed from yourself?  Probably pretty low for 4-6 months but it never hurts to think about it.

d.) Is this a one-time thing do you want to keep recycling your money?  The first time you do anything there's "pain" that comes with stress, mistakes, etc.  You learn from that and get better the second time.  I'd posit (assuming your numbers are right) making $10K and getting through those first-time hiccups wouldn't be the worst thing.

On a completely separate (yet, related) topic of "questioning this deal"...

I think the "questioning of the deal" really boils down to your faith in your numbers.  Most of the time if there are serious questions it's either "wedding night jitters" or you consciously (or subconsciously) padded your numbers.  

Thing about it this way, how many posts of BP are from frustrated BRRRRRRRRers that aren't stoked their ARV (post-rehab value) as denoted by an appraiser? I bet all of those people thought their numbers were solid. I bet all of those people thought they'd be able to pull 100% of their original investment out. The list of things they were confident about goes on and on.

So looking at your deal the risk isn't in those cost categories like taxes, closing costs, etc. but rather "is $450K really a conservative number?" and "is $175K really an accurate number?"  So who, locally, have you vetted those numbers through that's done this before?

Hi, is it possible to rehab, rent for 18 months, sell and pass the profit to a new acquisition in a 1030 exchange.  Haven't run the numbers but it may save some taxes.  Thx Dawn

Just to wrap this up, the wife and I have decided that this opportunity is probably too much for us to take on at the moment. As first-time rehabbers, this was likely more than we could handle, especially from a financial standpoint. We're already eyeballing a smaller project with the hopes it can return the capital to take on this project without giving me an ulcer by just talking about it. 

Thanks for the great feedback, folks. 

Originally posted by @Cosmo Iannopollo :

Just to wrap this up, the wife and I have decided that this opportunity is probably too much for us to take on at the moment. As first-time rehabbers, this was likely more than we could handle, especially from a financial standpoint. We're already eyeballing a smaller project with the hopes it can return the capital to take on this project without giving me an ulcer by just talking about it. 

Thanks for the great feedback, folks. 

@Joe Villeneuve , oh well, I tried... 

@Brent Coombs Ha! Don't think your words went for naught. I've already begun shifting funds to acquire the new property. Like you stated, the ROI is far too good to pass up through this avenue.

Originally posted by @Brent Coombs :
Originally posted by @Cosmo Iannopollo:

Just to wrap this up, the wife and I have decided that this opportunity is probably too much for us to take on at the moment. As first-time rehabbers, this was likely more than we could handle, especially from a financial standpoint. We're already eyeballing a smaller project with the hopes it can return the capital to take on this project without giving me an ulcer by just talking about it. 

Thanks for the great feedback, folks. 

@Joe Villeneuve, oh well, I tried... 

 LOL.  Remember the rule of "3's"

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