First Deal

General Real Estate Investing
1

I will be closing next week on a fixer upper. Exit strategy is fix and flip with rental as secondary back-up, as I am paying cash and with rents in the area going for $575-$600, I could recoup my investment, as a rental within 4 years. Even at $500, I would recoup total investment back in 4 1/2 years

House is a 3/2, just under 1000sf on an acre.

Price for house - $15,900
CC - $1100 (incl. attorney, title search, taxes for remainder of year, and title insurance)
Expected Repairs - $9K (includes 10% contingency)
Realtor commission based on expected $65K selling price (FSBO down the street on the market for $65K and needs work) - $2925
Total Expected Investment - $28,925.00

End result will be new kitchen, all rooms painted, new windows, tubs reglazed, new front and back door, new moldings to cap it off. Minor landscaping.

Not the best of areas and not the worst of areas. Comps in the area for a 3/1 go for between $60-$88K.

Anyway, as I said, exit strategy is fix and flip, with buy-and-hold as back-up. If buy and hold, open home equity line on the house to use on next investment house.

Because of price I am getting it for, Realtor suggested just flipping it without repairs to a buy-and-hold investor. Interesting thought, quick money, move on.

Based on the numbers, what would be the most all of you buy-and-hold investors would pay for this property? Or now considering this thought, which way would you move on this deal?

2

Forgot to mention carpets in room and linoleum in kitchen and baths…

3

I honestly like the clean-it-up-and-sell-as-is strategies for rehab flips.

Let someone else put the time and effort to rehab a property.

It’s more a personal choice than anything.

4

Put an alarm on the property with radio backup DAY 1. ($300 plus $30/mo monitoring)

Any house in that price range has the change of being robbed for everything.

This has happened to me several times.

Also call the local police station and ask them to do a drive by every eight hours.

One night we even had the police sleep in one of our properties…and they got two of them.

Matt

5

which deal is your first deal

6

Thanks to those who responded…

Turned out the HO was an investor trying to get rid of the property (rental)… She had accepted my offer, but then we found out last Friday (title search) that she actually owed $48K on the property, but after questioning her on this and letting her know she had to bring the difference to closing, she said that the bank had offered to short sale it for $15,400, just under our offer price.

One BIG detail/condition she neglected to mention was that the bank had to have the money by Friday at 2pm; we find this out at 1pm. Apparently she told them that she would have it to them the Monday before, got an extension for Friday, and they would not extend it past this (which I thought was dubious). Instead, they reinstated the loan, and put the arrears on the back-end, so she has now agreed to it.

Now that they have done this, I don’t know if I can now approach the bank with a short sale scenario or not, being that the loan is reinstated. Either that, or someone came in and offered her more and she put up a smokescreen about the deadline.

Any thoughts on this?..

7

I would like to explore the assumptions you made about your timeline to recover your investment costs in 4.5 years with a $500 monthly rental income.

If you pay cash for the purchase, rehab, and closing costs, then your initial investment is $26K according to your numbers. Property taxes, hazard insurance, maintenance, upkeep, and vacancy allowance will probably run about $250 per month, leaving you just $250 monthly cash flow to “recoup” your investment. At that rate, it will take eight years and nine months assuming that you have no major systems failures or replacements in the interim.

Could it be that you did not allow for your ownership and rental operating costs in your cash flow analysis? If so, does including these costs in your cash flow analysis affect your Plan B?

If your numbers hold up, even $250 monthly cash flow represents an 11.5% first year return on invested capital. Not bad in this current climate.

How much better does a buy and hold strategy get if you cash out refinance for $25K after six months on title? You will recover all your initial investment within six months, having none of your own money in the deal, and you will be collecting about $100 monthly cash flow after the refinance. If this stratgy appeals to you, the only question you need to answer is how many of these properties do you want to own in your rental portfolio?