Am I missing anything?

Question

https://www.biggerpockets.com/...

asking price is 164,000 3/1 sfr buy and hold

on market he could probably get 175-185 without any struggle.

rent is currently 1700

it has potential to add a living space, bedroom, and bathroom in the basement bringing rents up to 1850-2300

Its on the boarder to the next town over and has an excellent school district.

Is 155k seller pays closing costs a solid offer? its off market I'm the only one looking at it.

thank you!

Marcus Auerbach · Answer

@Zach Gring Joe is right. We typically finish the basement on a SF rehab and add a 2nd (large) bathroom if there is only one in the house. We only do this because we have all the trades on site anyway and can include it for a relativley good price, however I don't think I can get more than $50 extra in rent. This is in the Milwaukee suburbs, similar property value and rents as you describe.

So really terrible ROI on a finished basement if you look at cashflow; the reason we still do it because we have extremely low turn over; tenants appreciate the extra living space especially in the winter and even more with Covid.  My true turn over cost between lost rent and some work is on average 5k. So, by avoiding frequent turn over we are making our money back that way, but there is no way you can justify the cost through a rent increase.

Joe Villeneuve · Answer

What do you base your possible rent increase and PV increase on?  Simply adding bedrooms (especially in the basement), etc...doesn't automatically increase the rent and/or property values unless there are other properties in that market that are the same as this one would be with the increases...and those properties support the increases.  Since this property would be adding these "space additions", what you will most likely be gaining is a faster rent/sale...not likely an increase in rent/PV.  Basement bedrooms/bath/living doesn't equal above ground bed/bath/living...and in most areas, doesn't come close.

Also, being on the border of what could be a better market than the one this property is in, doesn't change the fact that this property isn't in that other market.

Joe Villeneuve · Answer

You can fix the basement all you want, and not increase the PV.  What you have is a 3 bedroom house with a finished basement.  The finished basement can increase the PV, but no where near what an extra bedroom would.

Also, if a 4 bedroom property in the market the property is in (not the one next door) isn't much of an increase in PV, the Finished bsmt increase will be less than that.

What you need to do is find someone (like that REA) that can fill you in on what the appraisers use to appraise.

Marcus Auerbach · Answer

Well, so that is pretty much what I do. As far as your after reapir appraisal don't expect much value either - I usually see about $18 per SF, which is about half of what it costs me.

I had many discussions with investors who think I am wrong and they will just opaint the basement white walls and fllors in battleship grey. I understand their math, you can't argue with it.

Joe Villeneuve · Answer

Appraisals used to be all over the place.  No, they are pretty uniform...and conservative.  Appraisers have been called to task a few years ago, so they have followed uniform rules closely, and conservative at that.

Zach Gring · Answer

@Joe Villeneuve

Are appraisals done differently everywhere?

Joe Villeneuve · Answer

THat only works if you can increase the rent/month more than the added mortgage increase due to the rehab

Zach Gring · Answer

@Joe Villeneuve

Oh, I didn’t even consider this. Interesting, makes sense though because then tenant is paying for it with mortgage and it’s not my money. Makes total sense. I like that.

Joe Villeneuve · Answer

Also, if you are financing the bsmt in the purchase, that rehab doesn't actual cost you the full $5k.  It will only cost you $26/month...which the CF should cover.  That means if you can increase the cash flow higher than $26/m/ it costs you nothing.  You actually lose money.  However, if the opposite is true, you will lose money in more ways than one.

It's not about the total cost...it's about how you pay for it...and that means who pays or it

Joe Villeneuve · Answer

It would be in your best interest to dig up an appraisal so you can see how they do it.  You'll find, as you move forward, that the agreed upon purchase price isn't always the same as what the appraiser says the property is worth.  You need to know how the appraiser values things because in the end, the lender   requires the appraisal, and that appraisal sets the PV...which also means it sets just how much of a loan they will offer.

If the appraisal is low (get used to it), that doesn't negate the deal...yet...as long as the buyer is will to make up the difference in a higher DP.

Am I missing anything?

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