As a newby, is my plan going to work?

Question

I am brand new to real estate, as well to BiggerPockets, and have been learning as much as I can just in the past few weeks. However, I have already found an opportunity I feel I can not pass up, even with as little knowledge and experience I have, and am looking for any and all advice and thoughts on my first move into real estate.

A life long best friend of mine has been offered by a family member for $20,000 to own outright a 3.5 acre lot with a run down mobile home on it. The place is overgrown and currently not liveable but is on a town road and has water/electric/sewer. My friend wants to include me in on this so we can both achieve financial freedom together.

The plan currently is to take out a personal loan together for the $20,000, put in $5,000-10,000 worth of work into the property to make it livable as soon as possible, move into the property ourselves so we don't have to pay rent anymore, and then refinance as soon as possible. Based off previous property taxes payed by the family member, we estimate the property to be worth roughly 100k once livable. Then, with a large amount of equity in the property, we look to get into the BRRR strategy.

What are some things I should consider, look more into?

Thanks in advance!

Travis Timmons · Answer

Not a terrible idea, but here's where I would urge you to exercise some caution.

1. Don't take on a partner unless you absolutely have to. Partnerships are really hard and usually don't end well.

2. The refinance portion of the BRRRR on raw land or mobile home AND having a loan under $75k (75% LTV on a 100k value) is going to be far easier said than done. Don't bank the deal on getting cash back in a refinance.

3. You're stacking risk factors - first deal, partnership, no existing revenue source, and making an off market purchase for the first time. I like the first investment to be pretty vanilla and boring. This has more upside but there is a situation where you run out of cash half way through and get stuck.

4. Everything costs more than you think it will, takes longer than you think it will, and exit strategies of selling or refinancing are a bit more complex and difficult than strangers on the internet make it seem. It's going to be tough, stressful, and expensive.

Hope that helps...feel free to send me a message if you think that I can be a resource. I have nothing to sell and would be happy to help.

Jonathan Greene · Answer

I wouldn't touch that with a ten foot pool if I were you. You are saying you don't have any money of your own to put into the deal so you are both borrowing just to get something that you have no real idea what to do with. @Travis Timmons has some great points and there is a lot of nuance to mobile home renovations, costs, title, etc.

Anytime someone says I am a couple weeks into researching and found a deal I can't pass up, they should pass it up. You aren't ready.

Travis Timmons · Answer

There is a very real possibility that you call a lender and get the answer you want now only to get a different answer when it is time to refinance.

There is just so much that you and your friend don't know (not your fault - we were all that way when we started out). That, coupled with the lack of reserves, can put you under. The fact that you mention "achieve financial freedom together" concerns me as well. I fear that you and your friend have big ideas and won't listen to what anyone tells you. You don't have enough cash and your plan is to borrow money on a project for which you are not capable of developing a realistic scope of work and budget. Even if it works out, it's a bad idea. You need 4 or 5 things to go right for it to work and only 1 thing to go wrong to break you.

Get an extra job, live off of nothing, and go put 3-5% down on a single family house hack. It feels like you are trying to skip steps rather than doing the hard work of delaying gratification, thinking long term, and slowly building wealth. Slow and steady still wins the race.

Peter W. · Answer

The real question is how much are you going to save on rent and how long are you willing to live in a house that is “uninhabitable”. Because the downside here is that you are forced to live in this place before you get it repaired because you can’t afford the personal loan and rent. Your monthly payment is going to be about 425/mo (20k loan 10% rate 5 year payoff) plus taxes and insurance. So your expenses are maybe 500/mo. If you’re paying 1500 in rent now you’ll be able to pay off the loan in 2 years while saving 500/mo. The upsides and exits will end up being tricky. Depending on your current rent, I suspect you are likely to recoup your investment in saved rent pretty quickly which makes me think it’s going to end up as a great learning experience, even if the upside doesn’t pan out.

Make sure you get clear divorce options for the partnership as living in a rundown trailer scrounging for money to fix it could end up rather stressful. The thing about partnerships are they are never 50-50, but everyone has to pretend they are and both parties thinks they are the one providing 60%+ percent of the effort/results. The other thing which is likely to happen is one of you wants to sell and the other doesn’t. Find a mentor who has successfully navigated these before and get their help with preplanning.

Keep cash on hand until you can prepay the entire loan rather than paying a bit extra monthly.

Rachel H. · Answer

@Grady Gilman If the mobile home has not been lived in for a while, it may need more work than it's worth costing more time and money. This could delay your plans moving forward.

Unless you and your friend are handy yourselves, it's best to talk to contractors who specialize in mobile homes (in their respective areas of expertise) to find out exactly how much it's going to cost to fix up the home. Figure in all the numbers and do all of your research before doing anything.

Personally, I see value in the land since the infrastructure is already in place. You may want to look into other options such as putting mobile homes on the land in better shape or figuring out how much the land is worth for resell purposes. Think about your options and exit strategy before you move forward with any plans.

I've known other investors to remove older mobile homes on land and replace with newer, used ones in better condition. So it can work depending on the numbers and the market. Though, this will take time and money. It's good to weigh out all of your options and decide on an exit strategy including what you and your friend want to get out of the deal.

If you have any other questions, feel free to DM. Hope that helps!

Matthew Paul · Answer

If the roof is leaking on the mobile home , and its been leaking for a long time , you are looking at a lot of work and money .

Grady Gilman · Answer

Thank you everyone for your insights so far, I appreciate it all. Sounds like I have a tough pill to swallow but I'm glad I found this forum for this exact reason.

Grady Gilman · Answer

Thank you for the insight, appreciate it. The home has a foundation and we plan on restoring the structure to have it classified as a single family residence, and then to lend against it. Sounds like we need to confirm this assumption of it being classified with a lender instead of assuming it will.

As a newby, is my plan going to work?

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