Newbie looking for advice

Rehabbing, Fix and Flip, Rental Properties
1

Hello all. My name is Michele and I’m very new to the world of real estate investing. I have my eye on my first piece of property (in Chicago/Cook County, IL) which I would like to buy, rehab and hold.

Ok…here’s my plan. I’m a 9-to-5er with very little savings. I’ve researched a couple of hard money lenders to finance the purchase of the property and the rehab cost. After the job is complete, I will refinance via a conventional loan. Using part of the equity to fund my next project.

The property will need a total gut rehab. I know I will need to get a big dumpster bin, permits for the electric, plumbing and HVAC work, as well as a permit for the roof and new back porch. I’m told I can be the general contractor on this because the property is only a 2flat.

So that means I will have to sub contract and supervise the jobs for all the needed trades for this job. My first question is, am I on the right track so far???

My next question is, because this will be a total gut rehab, I’m fairly sure the finished floor layout for each apartment will be different than it was when the building was first built. Will this be a problem in regards to the building inspectors? Or can I have the floor layout (safely) changed as I wish without any regards to the inspectors? Will I need to hire an architect and present blue prints to the county building people?

Once the roof, back porch, rough framing, electric, plumbing and HVAC work has been completed, I will have my carpentry crew come in and finish with the dry walling, painting, tile laying, and flooring.

Start (purchase/rehab/searching for tenants) to finish (refinance), I’m hoping this can all be accomplished in 3 month (give or take a day or two).

Does this plan make sense? Am I missing steps important to the success of my plan?

ANY ADVICE and/or GUIDANCE will be GREATLY APPRECIATED. Thanks one and all.

2

My first piece of advice to you would be… WHY???

From what I’ve read about the economic picture in IL there should be LOT’S of houses being foreclosed on for you to pick from.

I’ve been a General Contractor for over 20 years. This is a HUGE project for you to undertake right out of the gate. Here’s some thoughts and advice…

Moving interior walls can and will create structural issues in this home.
Some interior walls support floors above them, some are vital to your roof. Moving “bearing walls” can be very expensive.

3 months for this type of project by a new investor is VERY optimistic.
I would double that AT LEAST. The fact that you work 9-5 makes this prediction almost a lock. Guarenteed you will need to BE THERE for many decisions. I’m not talking about picking out colors here. Issues will arise with building inspectors, contractors you name it. Very hard to make a call when your in an office 20 miles from the site and you don’t understand what the building inspector is talking about when he says “Your header for these stairs doesn’t meet code height requirements” Huh???
Do you realize that as General Contractor YOU will be responsible for applying for and getting all permits? Guess when that office is open?

9-5 …BUT, the people in the Building Inpectors Office are usuallly VERY helpful :banghead

Very little savings… Always a great recipe for a successful project.

OK, now the I’m sorry for beating you up a little. I’m sorry.

BUT… believe me Michele the little bit of heat you just took will make completing this project seem like a joke. Here’s what I would do in your shoes…

First… find another project… I know your all revved up about this one but there’s TON’s of this stuff out there, especially NOW. YOU CAN do this AND make money!!! You just need something less ambitious.

Look for that home that has been neglected but still has good electrical, plumbing, roofing. Get THAT one. Do some painting, learn how to hang kitchen cabinets (it’s EASY) get it landscaped, cleaned up THEN sell it! The most important thing to do now is increase that savings. THAT is the seed from which all big things grow.

BE PATIENT. Use some mind games to calm yourself. Think… There is a home out there that has $25,000 in it that’s mine. I just have to find it!!! (I guarentee there probably 50 homes out there RIGHT now that have it)

Don’t force it. Especially now! Do a few easier ones and in 5 years, maybe less you’ll be thankful the first wasn’t the last. (and does happen, you can read all about it right here)

Your first purchase needs to be an absolute STEAL! The price has to be so low you CAN’T pass it up. Then, you can make a few mistakes and NOT get hurt.

3
My first question is, am I on the right track so far???

Michelle, forgive me for being blunt, but NO, you are not on the right track.

First of all, operating rental properties are ALL ABOUT THE NUMBERS. I don’t see any numbers in your post. What is the purchase price, gross rent, and repair cost for the property? No one can evaluate the validity of your plan without the numbers!

Rental properties will generate about $100 per unit per month in positive cash flow IF YOU DO EVERYTHING RIGHT. Getting a hard money loan for a rental will normally destroy your cash flow. Uncle Guido’s loan shark rates and fees are usually very high. In addition, doing the second closing for the refi will add more costs to your project. More cost = lower profits (or higher losses).

This rehab appears to be a complete gut job. This can be VERY EXPENSIVE and is a LOT to attempt for a new investor. Real estate investing is nothing like you see on those TV “flipping” shows. The majority of newbies fail in the rental business in a short period of time. Again, you need to start with the numbers. Nothing else matters if the numbers don’t work.

Good Luck,

Mike

4

Do you have any contruction experience that would lead you to believe that you can be the gencon on this job? Are you qualified to run a full gut rehab?

5

Ok, first let me thank you all for taking the time to respond.

Here are my numbers, I believe I could get the property and the rehab done for around $200K. The ARV will be around $325K. After paying back the $200k+ from the hard money loan (and various other fees and cost), I would refinace for about $250-$275.

Ok, maybe 3 months to complete would be stretching it a bit. The hard money loans I came across during my research will allow 6 months before the first payment would be do. Three months? Four months? Five months? Anythhing under the 6 months will be fine. The plan is to have the work completed before the first payment is due to the hard money loan people. The apartments could easily generate $1100-$1300/month (not counting the basement apt). I could get like another $600-$700 for the basement unit.

With the refiancing the interest rate could easily be cut in half compared to Uncle Guido’s loan shark rates. I see being able to pull $100+/month from each unit easily - even if I only got $1100/month per unit. And add another $600~ to monthly positive cash flow if I rent out the basement apartment.

I know this is a GREAT undertaking for someone who is totally new to the game. I have a master carpenter whom I have known for over 20 years who will be the “true” general contractor on this. I’m going to check in to the county requirements a little deeper to see if I can make him the GC on paper, since he will be the one actually on site and addressing all the issues. He has issues in his background which make him believe he should not/could not be the GC. But in the end he will be the one making all the calls and addressing all the day to day issues and making sure everyone is doing what they are suppose to be doing. He had done gutting and remods from residential to commerical so he is very much aware of weight bearing, headers and all that jazz. (I’m basically looking to lose a pantry and maybe 1 or both hall closets to enlarge the kitchen and bath areas.)

I know these were important details to the complete picture…it was just late when I did the original post and I wanted to get my question out there and provide the balance of details today when I had more time.

Yes, I’m new. I’ve not been able to find a local mentor to help me, so I’ve just decided to do some math and ask some (ok…lots of) questions. My math says I can end up with like (approx) $125 in profit/equity in this deal. Again…am I on the right track?

The way I see it, things are just not moving too quickly these days when it comes to flipping. So I was looking at making a big first strike and killing 2 birds with 1 stone (getting money to finance my next deal and creating a positive cash flow). In the end, I hoping that this deal will enable me to venture into other areas of rei with money at hand if needed.

FYI: I see me having to hit my 401K for about $10K (netting about $6200 after taxes and penalty fees) to cover the earnest money, inspection, apprasial and other misc cost in the beginning.

Suggestions? Advice?

6

Michelle,

Here is the way I see the numbers:

Conservatively:

Gross Rents: $2,800 per month ($1,100 + $1,100 + $600)
Operating Expenses: $1,400 per month
NOI: $1,400 per month

Mortgage payment ($275,000, 6.5%, 30 yr): $1,738

So, to be conservative, your monthly LOSS will be $338.

Best Case:

Gross Rents: $3,300 ($1,300 + $1,300 + $700)
Operating Expenses: $1,650
NOI: $1,650

Mortgage Payment ($250,000, 6.5% 30 yr): $1,580

In the absolute best case, your positive cash flow would be $70.

That doesn’t look like a good deal to me.

Mike

7

Mike,

I truly do thank you for your insight. But I guess I must be missing something that you know from experience that I dont. Please explain how you come up with the monthly operating cost. I see my operating cost to be water/sewer/trash, property insurance, landscaping/snow removal. Plus contributing to a reserve fund every month for those occassional unexpected maintenance expenses. Am I missing something else? (Tenants will be responsible for gas and electric.)

Based on your numbers, I can see where it’s not going to be as profitable as I was thinking. (I forgot to deduct the monthly water/trash, landscaping expense.) I did remember to include the estimated cost of insurance.

Again, I am learning. A few months ago, I was so new that I didnt even know what questions to ask. I think I am making some progress (even if I still have yet to make my first deal). At least now I do have direction enough to ask questions. :biggrin

8
Please explain how you come up with the monthly operating cost. I see my operating cost to be water/sewer/trash, property insurance, landscaping/snow removal. Plus contributing to a reserve fund every month for those occassional unexpected maintenance expenses. Am I missing something else?

Michelle,

Throughout the United States, operating expenses run 45% to 50% of the gross rents. I always use 50% to be conservative. Operating expenses include taxes, insurance, managment, maintenance, advertising, mowing/snow removal, entity maintenance, utilities paid by the owner (there will be some even if the tenant is responsible for the utilities), legal fees, evictions, court costs, office supplies, damage done by the tenants (above the deposit), lawsuits, etc, etc, etc. (I could go on and on).

Mike

9

Michele, If I were you I would take some time and read ALL of property managers posts. It will be the best education you could ever hope to receive.

Some folks on these forums like to paint a rosy picture of their experiences with rental property, Mike lays it all out there, the good, the bad, and the ugly.

The potential problem Mike is warning you about is being upside down in this thing MONTHLY. That will kill you quicker financially than a trip to the casino with your life savings in an envelope. Everyday we’re reading stories here about people who bought properties and are upside down in them but can’t sell because no experienced investor is going to go near a building with negative monthly cash. Then your done. Can’t afford to keep it, can’t sell it. BAD, BAD DEAL.

I hate to leave you on such a negative note but remember there is always another deal waiting around the corner. BE PATIENT, this one’s a pass, FOR SURE>

10

WOW!!! Thank you all for the enlightment. I think I will continue my search for a first deal to make. I see now that this one might be too much for a newbie to undertake. I truly thank everyone for the advice. Again…THANK YOU!!!

11

Michele,

One last thing…I hope you realize how important your last post is.

Just the fact that your willing to admit that this deal isn’t a good one moved you far ahead of other new investors. You wouldn’t believe the posts I read here about people who ask a question like yours and then completely ignore the advice given.

You have taken a huge step. You might not completely realize it now but you have. :beer

12

Thanks Pete. That really does make me feel good about my decision to continue my search for my first deal. Afterall, I am here to learn because I truly do not want to start off making a costly mistake that will hinder my chances of being successful.

If I can’t listen. learn and take the advice of the vets (here or anywhere)…then I’m doom to fail. And failing is just not an option I want to entertain!!

The only option I want to entertain is a lease option. (HEHEHEHE…I made a funny…LOL) :biggrin

Thanks all…and dont think you’ve seen the last of me. I will be back with more and more questions!!!