Keep Or Sell?

[Antonio Martinez]

Hey guys, I recently purchased a distressed single family home for 5000. My initial intent was to sell the property to another investor to increase my capital and invest that into other projects, but I have changed my mind and want to use it as a rental. A full rehab cost would be around 25-30,000 (conservative numbers) and the ARV would be somewhere around 65- 75,000 (conservative numbers). Since my capital is low I was planning on utilizing my credit cards to fund the rehab. I want to keep this property and also look for more distressed homes without having all my money in. I was wondering if any of you experienced entrepreneurs had a better way of dealing with this situation.

[Leo R.]

@Antonio Martinez so, as you know, this property is dirrrrrt cheap, which leads me to assume this property is in a very rural area and/or it's a is D or F grade property in a D or F grade area.   Have you ever managed a rental in a D or F grade area?   ....if not, I strongly suggest studying up on that topic.

I'd also definitely suggest reading up on the risks of funding a rehab with credit cards--especially  if you've never done a rehab using credit cards, and especially if you don't have the cash reserves to stay afloat if things don't go according to plan.  Obviously, I don't know anything about your finances, so for all I know, you may have a few million in the bank, and this project is just a fun experiment that wouldn't even be a drop in the bucket if it all turns south...but, regardless, you'll want to model out what would happen if this project crashes and burns...

As you may know, managing a rental in a D to F area (or even a C area) is usually not recommended (for many reasons), and funding a rehab with credit cards is also usually not recommended (again, for many reasons). ...even highly experienced investors often won't touch anything lower than C grade because of all the difficulties of managing and re-selling them...

If you're dead set on rehabbing the place and keeping it, I'd strongly suggest studying up thoroughly on the local rental market and tenant pool (e.g.; rent medians and lower and upper bounds, typical days on market before securing a tenant, local vacancy rates, tenants' typical income, education level, employment opportunities, credit, and rental history). You'll also want to  thoroughly study up on the many challenges of managing a sub- $100k property. I'd also suggest running some for-rent ads, to see what type of response you get.

It's notoriously difficult to accurately predict ARV on these types of properties, because they're so niche, and the market for them is usually completely different than the market for more standard properties...For instance, a lot of lenders won't provide a mortgage on a property for less than $100k--and if that's the case in your area, that would mean that the only potential buyers for the property are cash buyers, which makes selling the property more difficult. Even if you don't plan to sell, you'll always want to be analyzing all potential exit strategies (including selling). Specifically, you'll want to collect and analyze a LOT of comp sales data (including data pertaining to days on market, price reductions, the buyer pool, etc.) so that you have a very good understanding of the buyer pool, and how difficult it could be to sell this type of property...I'd suggest talking with multiple agents who have experience with this type of property, and asking them what type of DOM, ARV, and sale experience they would predict for the property.

Before you take on $25k+ of credit card debt for a rehab, you'll want to consider all the potential problems you might face with your strategy, and potential solutions to those problems. For instance, let's say you do the rehab and go to rent it...considering the relatively low value of the property, it's reasonable to expect that the tenants will have low or no credit, they may be unemployed or on income assistance, they may have minimal employment options, and/or they may have a very spotty history with prior rentals. If the property is in a rural area, there might not be much of a tenant pool at all... If you have credit card debt from the rehab, you're under the gun to either get it rented, or sell it (and being under the gun usually leads to poor business decisions, like renting to unqualified tenants or forced selling). ...as I always say "the best time to buy a car is when you don't need a car, and the best time to sell a house is when you don't need to sell a house"    ...If renting it is too much of a hassle, and you go to sell it, you may find that it sits on the market for months (because again, sub-$100k properties are usually a very niche thing)...if you have credit card debt from the rehab, and the property isn't renting or selling, that's obviously a bad situation...

It's also worth considering how much this property will rent for after the rehab. Even if you find a dream tenant, a sub-$100k property usually isn't going to rent for more than...what...$500/mo? $1,000/mo? ...after you take out the debt service, capex, and vacancy, what are you left with?  ...moreover, how many of these types of properties, at that rate of cashflow, would you need to make it all worthwhile?

...I'm not saying that your plan can't work, I'm just pointing out that these types of extremely cheap properties usually come with TONS of unique management and sales challenges that don't occur with more run-of-the-mill properties, so you'll want to study up on those issues and have a game plan before proceeding...regardless of what you decide to do, it may be a good idea to consider how you could leverage this deal as a springboard to get you to other, higher-grade properties...

...the good news is that you're only $5k into this thing, so you're not in too deep...yet...

Good luck out there!