First investment Construct and Rent

[Jessica Uresti]

First time investors. We found a property (multi-family) 2 units, 2 bedrooms/2 baths in the front house, and a full bath with kitchen efficiency in the back unit. Good price in a developing neighborhood near downtown Houston. Construction was stopped midway and it is for sale. We brought our contractor to take a look and he gave us a estimate. We will be getting a more detailed estimate. From what we know of the cost of the house plus to finish construction we can afford the loan. Also putting the numbers in, the rental income should give us maybe $400 -$900 profit a month once both are rented.

Our lender and realtor seem to think we are crazy because the property needs floors, walls etc etc to be completed. I am wondering if we could be getting in over our heads on this.

Any thoughts? Thank you.

[Mitch Messer]

Quote from @Jessica Uresti:

Quote from @Mitch Messer:

Quote from @Jessica Uresti:

Quote from @Mitch Messer:

@Jessica Uresti It sounds like a major renovation, so you may be getting in over your heads on your first deal.

But, let's talk numbers first: Can you share the financials that indicate "$400 -$900 profit a month?"

Also, what exactly was the quote provided by the contractor?

 Hi Mitch thank you.

The listing price is $140k the rough estimate is 65k for finishing the construction. Framing, electric, plumbing is completed. Sheet rock is purchased. For both units. We are planning on getting one more estimate not a formal one yet but a rough one from another trusted contractor.

I put this information in a Google sheet and that is where I got the profit number. 

https://docs.google.com/spreadsheets/d/1HpdX8GG4tDZVtfVykfs6...

 Great, can you (just for now) give "Viewer" access to anyone with the above Google link?

Ok it’s open! Thanks.

Here's what I see:

1. First, your cash flow is showing as $2,367 per year. That's only $197/mo of spendable profit, not $400 or $900.

2. I don't know your market, but the vacancy estimate of $450 seems waaay low. At 2% (actually, it's just 1.875%), you're saying you expect each unit to go vacant for just one month out of every 48! A more realistic vacancy estimate is 1 in 12 months, or 8.33%.

3. Your operating expenses appear to exclude property management, which can be 8-10% of your rental income.

4. I didn't see where you captured the down payment you'll need to get bank financing, or the costs to close the purchase, as part of your initial investment.

5. Assuming it's accurate, a 5% cash-on-cash return (cell F22) is not nearly enough to justify all this effort! We typically won't look at deals offering less than 10% CoCR.

Honestly, I don't see much of a deal here.