Help! How much should invest in an inherited fixer upper?

Question

Hi BP!

My grandmother recently passed and left my brother and me a windfall. Three houses (zero morgtages) all within the Central District, Seattle. Prime location! My brother and I have no interest in selling but eventually plan to build a few townhouses on the site.

Right now the houses are in terrible condition - like 30 plus years of neglect, almost condemnable. Our plan was to spend some money getting them to renter-friendly condition (by borrowing against the properties/ no money down). However, we've received some sticker shock. Like, our budget of 50-60k per house is actually closer to $110k per house. Now, we're faced with how much we want to invest in homes we eventually plan to tear down. Our plan was to wait 3-5 years to begin building.

My immediate plan was to hire an inspector to see what is a priority to fix in the short term.

A few questions:

1) Should we just demolish and pay maintenance costs - and not gain any rental income?

2)  Should we refinance the homes and just take the minimal cash flow?

3) What are other options I'm not considering?

Thanks!

James Dainard · Answer

Hey Kyla,

There's a lot of great advice already on your thread but I thought I'd chime in as well.

I'd recommend against option 1 unless you're planning to build right away. There's no reason to incur the holding costs if you're not planning on making any gains on that cost in the near future.

If you can get them renter friendly with minimal cash out of pocket and refi while you're pulling permits/waiting for development that would be the ideal situation. You can always decide later to hold on to it or sell it early in the permit process.

Selling is always an option, you could get the equity out of this property by selling to a builder or an investor to go buy something that cashflows better or is easier to manage.

You could partner with a builder. You could put up the land and they could build out the site for you two split profits at the end. This all depends on what they're planning to build, what they will cost them to build, and what it will sell for.

I hope those help!

Feel free to reach out to my team with any questions, we'd love to help!

Bruce Woodruff · Answer

What Account Closed said ^^^

No point in putting that much into properties you are going to tear down in a few years, it's like throwing money down the toilet. And to renovate 100 yr old houses......$110k sounds way too low.

Account Closed · Answer

If they are inherited you probably received them tax free, to a certain percent, anyway. That is a good thing.
If they have been neglected for 30 years and they are in the CD, the house is likely 100 years old. Yep. That's going to be expensive. That is a bad thing.

If it's almost condemnable, it's unlikely you will get any lender to lend against it. You will still have ongoing property taxes, squatters and liabilities.

Without being emotional about it, you are most likely best off selling it "as is" while the market is still above what it is going to drop to and investing that money in better properties.

Bless Grandma for remembering you, but she got the wear & tear out of the house.

Now, move forward and use that windfall to further generational wealth without throwing your money into a money pit.

Sergey A. Petrov · Answer

The math is really simple. Say you plan on a demo and development in 3 years. You put in $120k to get the properties “rentable”. Will you collect more than $120k in rent (minus expenses and carrying costs while the rehab is underway)? If the answer is yes and the excess net income is a number you are ok with, go for it. The excess income could be $10k. Are you ok with making only $10k in three years in exchange for the time and effort you will have put into it?

Matt Ziegler · Answer

Fist off, sorry for your loss. Hope you grandma had a full life and a peaceful passing.

Have you considered selling them with owner financing?

That may get you cash flow, and some cash in hand…down payments.

This may allow you to benefit from the stepped up basis and set you up for future investments.

Michael Haas · Answer

@Kyla Nicole Nickerson Jones what is your zoning? If its LR1, LR2, LR3, NC, or any other high density zoning I wouldn't sink any money into them - highest and best use is to tear them down and rebuild in those zones. I'd sell as many of them as you need to get the working capital to build on at least one of the parcels, or do a Joint Venture with someone who knows townhomes and secure financing to build out all 3.

Account Closed · Answer

Since Grandma has passed they already get the stepped up basis and any appreciation would be taxed as capital gains. No point to do that on a property that will be torn down soon.

If they sell now, there is no capital gains or very little to worry about being taxed on.

Bruce Woodruff · Answer

@Kyla Nicole Nickerson Jones Think about the economy and where it might be going too, before you make a decision. What do you think is a better time to buy or sell, or remodel...?

Deandre P. · Answer

@Kyla Nicole Nickerson Jones It really depends on the cash flow difference on the conversion of townhomes vs single family.  Do you have an idea on how much cash flow you can get once they are converted to townhomes? Vs how much cash flow you can achieve once they are renovated? You can compare the two different scenarios with the estimated cost and see which scenario will give you the better return. Outside of return, I think the townhome scenario may be the harder of the two to accomplish (lender requirements for tear-down/new construction).  While $110k seems like a lot, the ARV (after repair value is likely well above that, and you can do a BRRRR on each home and make a good profit.  My suggestion would be (If the ARV allows) to do a hard money loan for the repairs, do the repairs, get it rented, and then do a cash out refinance for the hard money loan. The amount you will walk away with at closing depends on the ARV but assuming each property ARV around $200k you could potentially walk away with 20k to 30k for each property.

Account Closed · Answer

How many sq ft is each house?One story or two?When were the roofs last replaced?Do the have the old octopus vent heating or has that been updated?Is the plumbing the original lead or has that been replaced?Is there any asbestos on the pipes or in the attic?Do they have the cedar shake siding? If so are there a lot of cracks in the siding?Is there lead paint or has that been sealed?What condition are the walls, ceilings, trim, floors in?Any cracks from settling?Probably needs a good paint job inside and out.Has the foundation shifted?Are they retro fitted for earth quakes?Is it knob & tube wiring?Any rot or water leakage in the basement or 1st floor?Claw foot tub or updated?Any signs of rot or mold around the tub or shower or other baths or kitchen?Any outlets or lights that aren't operating properly?Is it 60 amp service or 200 amps?Is it fuses?Are there any add on fuse boxes?Those are the questions that get me started in deciding if it's worth working on.I don't know the location of the houses but a random 4 bed 2 bath two story on 24th and Spring gets about $4,000 a month according to rentometer.comSo, if we take the $110,000 to renovate divided by $4,000 rent minus $625 for property tax, $200 for insurance leaves about $3200 a month for debt service. So it would take 34 months to break even, about 3 years. (If nothing went wrong, not including renovation time and vacancies) Evictions are tough to do in Seattle. Doesn't seem worth it to me to renovate, rent out, tear down and build. Also. Seattle always takes longer to renovate in the winter.I'd sell "as Is" or do the renovations and hold onto the properties and expect it to take 3 years before I had the loan paid off. Then you cash flow about $3500 a month.

Help! How much should invest in an inherited fixer upper?

Most Popular Reply