Newbie. Old family home. Fix and Rent, or Cut and Run?

Question

Hello, BP community!We are new, aspiring investors. Several years ago, we moved to the Tulsa area to be near our grandmother. In 2018, she moved to assisted living and we sold our home and purchased hers for $68,000. The house was built by my grandfather in 1938 (he had it built, not by his hands) and I grew up there. Our initial intention was to live there for years and slowly fix it up, as it needs quite a bit of work; think central heat and air, windows, fencing, as well as updates (among other things). We already paid $14,000 to upgrade the wiring, but have quite a bit of rehab to go. The home is around 1,200 sf, 2bd / 1ba with a detached 3 car garage, where one stall has been converted to a separate area w/ additional bathroom, which could potentially be another small studio rental. When COVID came, my partner was transferred to Connecticut. We sold a small cabin we owned in order to make a down payment on our Connecticut house, as our house in Oklahoma still has much of my grandmother’s possessions occupying space (we were tasked with getting rid of her furniture and many collections). We planned on having an estate sale to clear her things. Right now, it is just sitting, costing $. The assessed value of the property has doubled in these past 3 years due to gentrification and a revitalization of the downtown area, which is walking distance from our property. The house, itself, is very unique and appealing on the outside, but does need some work. I recently saw a video podcast with Brandon Turner, where his guest made a suggestion to those just starting out in real estate investing to “rent what you’ve already got”. The above-mentioned are the only real estate dealings we’ve ever had, but are looking to learn and potentially build a portfolio. I think our property could have potential to be a nice STR, but am at a loss about what to do, how to start, or whether it is worth it or not. If anyone has any advice or ideas, I am eager to learn and ready to move forward, one way or another. Thanks everyone!!!

Joe Villeneuve · Answer

I would say do the thing that will probably be the hardest thing to do...sell the house "you grew up" in. The profit is more valuable to you based on what you can do with it, than the limited CF you'll get which will be offset for many years (based on the age of the property and subsequent rehab needed) by the cost of the rehab. If you sell, take the profit and use a a 20% down payment on a true rental property with high positive CF, you'll be light years ahead in profit by the time you break even holding this property and doing the rehab.Do the first step of the math:1 - Figure out what profit you'll make selling the property.2 - Then calculate all the rehab needed, all the monthly expenses you'll need to cover holding it with a tenant in place (add in the monthly expenses when the tenant isn't there...as in rehab time), and subtract that from the potential (realistic...not high end wish). 3 - Multiply that number times 12 to get the yearly cash flow "potential".4 - Now divide the number from Step #1 by the number from Step #3.That's how long it will take you to wait for the cash flow to equal the dollars in hand right now.5 - Take the number from Step #1 and multiply it times 5 to get the total property value you can buy using the Step #1 cash as a 20% DP.6 - Compare number from Step #5 with Step #1 to see what you're losing in Property Value if you hold the property.7 - Find out what the potential CF could be on the properties you bought from Step #5, and subtract that with the number from Step #'s 2 and 3. That's how much Cash Flow you're losing by holding this property.

Joe Villeneuve · Answer

I didn't misinterpret anything. I just took your comments to the next logical steps. Here are your quotes:"You'll never (you used the word "never" here) build a portfolio if you continually sell what you have""Also, if you're REALLY close to the downtown core you will likely see changes in the zoning densities allowed (assuming your city is growing). If that is the case then your property is even more likely to make a shift in what it's highest and best purpose is in the future. Another reason to hold onto it".

Dahlia Khalaf · Answer

@Drea Kade I am a broker/investor here in Tulsa. I would be happy to get more info about your property and chat about options! I will message you.

Jimmy Ogle · Answer

Unless you plan to purchase more in the Tulsa market, if it were me, I would sell and invest closer to you or where you plan to buy more property.

Dale Degagne · Answer

No problem. Hope it helped. It does sound like you may be able to renovate, rent, refinance it, but like joe said. Lots of unknowns. I would suggest nailing down things you can reasonably know. Current value, cost to renovate, timeline, predictive value once complete, likelihood of achieving refinancing and at what Loan to Value. Then I would suggest having a plan for the rest of the money. I would also suggest looking at at least 1 alternative strategy. Joe suggested selling. Again, I would use things that you can reasonably know. Maybe it's selling and buying a lot and putting a house on it. So you can learn the price of the lot, and an estimate for construction per sq ft and a time line. Compare the two and see which meets your goals better/generates more equity for you. Again hope that helps.

Dale Degagne · Answer

I think you misunderstand basically everything in my post. There was no suggestion of putting themselves in a negative cash flow situation. That's dumb.There was no suggestion of taking their own money and using it to pay down the mortgage. That is also dumb. There was no suggestion of passively sitting and hoping for things to work out. That is also also dumb. I did suggest they look at refinancing as a way to increase their leverage up to 5:1 and use the rest of that equity to either add value to their current property or purchase a new one. I did suggest that they keep their money active. Whether that is through flipping, or maximizing leverage.I did suggest that if they want to build a portfolio (not a bank account), then they need to hold properties and that holding properties can (and usually does) make sense depending on their financial goals.

Drea Kade · Answer

To the point about refinancing: I have been reading about the BRRRR method, and that is initially what I was hoping would be the thing that worked for our situation. It’s nerve wracking being new to all these decisions, and feeling like there is so much at stake. I don’t know what any of the more experienced members would say, but it seems like it would depend on short vs. long-term goals, or how one wants the wealth-building process to look like. I’m not sure if equity should be my biggest concern right now? I think it makes me feel more secure, but isn’t educated risk also part of the equation? Making those decisions and overcoming those fears is the real struggle for me at this early stage. Thank you!

Dale Degagne · Answer

Hi Drea that is a doozy of a question. Reading your post a couple things come to mind. 1st - You'll never build a portfolio if you continually sell what you have. ***CAVEAT*** it SOMETIMES makes sense to sell IF you have a plan to roll the money into that makes sense. 2nd - It sounds like your property is not at its highest and best purpose. As a single family home, it likely would benefit from the improvements you're talking about. Obviously you should be careful not to put lipstick on a pig, or throw good money after bad, but typically, recently rehabbed properties will typically sell/rent/be appraised for more than something that has not. Also, if you're REALLY close to the downtown core you will likely see changes in the zoning densities allowed (assuming your city is growing). If that is the case then your property is even more likely to make a shift in what it's highest and best purpose is in the future. Another reason to hold onto it.3rd - Having it re-appraised and taking a bigger mortgage on it would make sense if you can a) use that money to invest it back into the property/into another property. b) if it will still cash flow after refinancing. This is a classic way to build your portfolio (buy systematically refinancing properties and using their appreciation over time and mortgage paydown to buy more properties). I know that can't cover all the intricacies of your market, or family situation, or financial goals etc. But the principals of holding onto property and creating value by elevating properties to their highest and best use, and of using equity via refinancing, are all pretty standard principals in investing.

Drea Kade · Answer

Thank you for your response. I know that analysis makes a lot of sense, yet I find myself “what-if-ing” myself into stasis. What if it won’t cost as much to rehab as I think? What if we can’t get assessed value for the house if we do sell it?…Hindsight is 20/20. We never expected this to become our introduction into investing, but I think it’s definitely a strong lesson about keeping emotion out of any future deals! Just focus on the numbers. I wish we had stayed in our original house (which is in the same neighborhood) and could have sold it for a hefty profit, as well (and would have been much easier to let go). But, here we are…Thanks, again!

Joe Villeneuve · Answer

1) The exact opposite is true. The longer you hold a property the less value your equity has. When you buy it has a value of 5 to 1. Since the property increases in appreciation are equal to the increase in equity, as in a 1 to 1 value, it reduces the value of the total equity as it grows. Selling will increase your portfolio exponentially faster. The value isn't in the passive equity build...it's what that built equity can do when it's active.2) The future in this case isn't predictable as far as it will generate profits/value. Too many variables out of the control of the owners. Besides, by the time if/when the "projected" financial rewards are gained passively, the same equity in motion should be exponentially larger. See #1 above.3) There is no "if" here as far as cash flow. Negative cash flow is a "classic way" to lose money. When you combine this with Steps 1 and 2 above, you end up with exponential losses. Also, paying down the mortgage only increases the cost to the REI. The tenant is paying the mortgage for you. When you add your money to it, you're not saving anything...just adding to your cost, and reducing your CF.