Closing on 1st Real Estate Investment with questions.

[Aaron Thivierge]

Good afternoon. I've been a member for 4 years or so, but I got distracted for 3 of them.  Now, the fire is lit again, and I'm motivated. 

I have been in discussion with 3 owners of a single family home that has been a rental for 19 years.  The same tenant has been there for 19 years.  It's a 2 bedroom, 1 and 1/2 bath in a very good location in  Jacksonville, Florida. The home sits on a double lot with a massive yard in a very desirable A school district ( people literally buy homes in this area just to send their children to this particular school).  
2 of the 3 siblings have agreed to a purchase price of $60,000 and I cover all closing costs and do diligence money ( survey, title search/ insurance, real estate attorney, etc...).  The third sibling will most likely consent as well....he's been distracted burying his mother in law and settling her estate.  But, he is most likely on board as well.  

Here are the numbers:
After repair value:  $180,000
Purchase price :  $60,000
Repair costs:  $45,000
Fair market rent:  $1,100/ month
Current rent ( and has been since 1998) : $600

I have talked to the Tennant ( with permission from the three siblings/ owners) and his plan is to retire in September and move back to Ky.  So, I have options.  Do I :

A.) put the repair money into the home, flip it in this hot market and clear $65,000 after all expenses? I have an amazing contractor ( also a flipper and close personal friend whom I trust exclusively).  He walked the property with me and sent me a renovation proposal with a 2 month time frame start to finish.  

B.) Put $20,000 into a light rehab and rent it for $1,100 / month and hold it long term

Property taxes are $1100/ year
Insurance will be $1200/ year 

 My ultimate goal is to acquire buy and holds for long term wealth. 

This is a unique situation because the numbers make sense to flip it.  But, my desires are to add doors to my portfolio.  I am 41 years old and have a $400,000/ year salary currently, so I don't need the money immediately ( except to put back into acquiring more real estate).  

What would you do and why?  I appreciate your opinions.  

[Brandon H.]

First I'd check the zoning and make sure you're in compliance with the property with the house, gazebo, and garage (e.g. be absolutely certain it's not too close to the lot line, utilities are setup properly, etc.). If the vacant lot is zoned for a duplex, I'd probably go that route but wouldn't bother going through the re-zoning process to do it - this is an area outside of my level of experience so I wouldn't be comfortable going that route. Might be worth exploring though - go down to your local building/zoning office and ask them how it works. Every market is different. I'd also get some quotes from contractors to build a SFH or a duplex (any chance you could fit a threeplex on that lot?) so you can start running the numbers. If you go down this route, you may need to secure a construction loan from a bank or, alternatively, refinance your other property to get cash and use your line of credit (discussed below) to pay for the construction.

You may also get yourself into some trouble if you rent the property out and don't write the contract to explicitly state that it's only the one lot (this means that you are responsible for maintaining the vacant lot).  You sound like a smart guy so you've probably already thought about this.  Just calling it out.

Regarding the line of credit - is the rate fixed?  If so, for how long?  What are the terms (e.g. can they call the debt on you)?  I'm assuming this is a typical interest only loan.  Going the line of credit route isn't necessarily a bad thing - it will save some of the hurdles you normally have to go through for a conventional mortgage (e.g. appraisal, inspection, etc.).  Interest only payments would be ~$417/month - slightly higher than my original analysis and you're never paying off principal.  Here's an updated breakdown:

Rent = $13,200 (i.e. $1100/month)

Interest only loan payments = $5,000

Property taxes = $1,100

Insurance = $1,200 (as stated above, this is probably high)

Property mgmt @ 8% = $1,056

This would yield $4,844/year in cash flow before maintenance, HOA, vacancy, placement costs, etc. but, this time, you wouldn't have put any money down since you're using the unsecured loan. Downside is that you are never paying down principal since it isn't a mortgage. You could simply make extra payments each month to pay down the line of credit which would increase your cash flow.

In my view, this isn't a bad option and I'd probably do it - you can always refinance the property to a traditional mortgage later on down the road.  To be honest, 5% isn't a bad rate either - I have 4.75% on my rental in Jacksonville and I did that loan before rates went up over the last 18 months.  If you're getting a conventional mortgage, you might be in the 5% range anyway.

My opinion: Take the $100k line of credit and close on this property ($60k). In the meantime, start researching your options with the vacant lot: (i) sell the vacant lot, (ii) build a SFH, (iii) build a duplex, (iv) some other option, etc. Once you close and the current tenant moves out, begin the light renovation work ($20k), and get it rented out so you can use that cash flow to cover your operating expenses. You should still have $20k left unused from your loan. It's highly unlikely that you'll be able to build anything for $20k so you'll need some more capital. Look into refinancing the occupied property - you should be able to get enough cash from there to do the construction on the vacant lot. This is a big project so take your time in getting your plan together.