Cant decide on a deal. Yes or no??

Question

I currently have a deal locked up under contract using a 20% down conventional loan.

Single fam 3 bed 1 bath. I got it at full price ($75K) without seeing it first. The property is tenant occupied by a tenant who was not being cooperative with showings so based on the numbers and comps decided to move forward with the offer without seeing it to beat out all the competition, which I did.

Comps on the street are going for about $120-$130K if they are in good shape. I also have considered renting it which would generate an excellent cash flow around $6-$800/month.

I elected a home inspection in my offer to ensure I could pull the plug if need be if it wasn't up to par when I went through. I went through and conducted a home inspection and it was in really bad shape. Pretty much every aspect of the property is in need of repair/replacement to the point where I am amazed that the tenant and her family are even living there (its section 8).

So, I took that report and ran with it and I basically got the sellers to drop the price down to $55k. Even with the $20k reduction I am hesitant to move forward. I have never taken on a project like this and I am not so knowledgeable with estimating rehab costs. I have the cash to make repairs but I don't know how much it will cost me to either get it in rental condition, or better yet rehabbed to flip.

The house needs:

• Complete roof, soffit, gutter, downspout replacement.
• Basically all plumbing is shot. 
• Outdated HVAC.
• Sub flooring under toilet and kitchen sink is rotted from leaking.
• All windows (6) are original and need to be replaced.
• Driveway is crumbled.
• Kitchen cabinets and counter tops are in really bad shape. 
• Shower and bathroom sink defective and in bad shape.
• All carpeting replacement (or refinish hardwood underneath. 
• Drop ceiling in basement needs redone.
• Whole interior needs painting/patching. 
• All doors need replacing. 
• All vent covers and light fixtures.

I have a ton of pictures but would love to hear any insight.

Frank S. · Answer

Is that amount with property insurance ($1000/year)?

Will you refinance after the 60k ish, ish, rehab?  Then,  your property taxes will double.

Save 10% for Capex and turnovers, assume 8% for property management, and 10% for vacancy, an umbrella policy for 1M is cheap-get it.

Good luck,

Frank

Frank S. · Answer

I don't see how it can cashflow $9,600/year after accounting for insurance,  property taxes,  maintenance, and management fees. The deal is at 1% (cost/ rent). Check your numbers.

Good luck,

Frank

Thomas S. · Answer

My opinion is that you are in over your head if you do not know the cost of your renovation prior to purchase. I agree you are likely looking at the 60K range on this project and that is without the inevitable cost over runs. Your biggest issue will be managing your contractor costs. It is a very difficult, and often very expensive world, when venturing into the reno game dealing with contractors. You are going to lose money on this deal in my opinion.

Frank S. · Answer

I see,  $1300 is very different than $600/$800 in rent.  If accurate,  that changes the calculations. Check your numbers as you increased the rent considerably.

You have big repairs.  Keep the scope of work under control. I think you should define if this is a flip with a rental as a secondary exit a strategy, or if you are going to keep it as a buy and hold from the get-go.

Some very rough numbers may look like this,  roof and gutters 10k, bath/floor 7k, kitchen 10k, paint patch 7k, floors 3k, windows 2.5k, hvac 7k (central air and furnace), electric  trim, lights 1 k, doors $200a piece (door and  hardware),  water heater and plumbing (excluding bath and kitchen above) $1,800, driveway ($10/sf for concrete), ceiling at basement $800,  demo $1000, electric,  water,  taxes,  holding costs,  etc . You may be looking at a $55,000 to $65,000 rehab depending on finishes, work you can do,  and contractors prices.

Exterior work,  landscaping,  realtor fees,  and closing costs are to be accounted for a flip.

Best of luck,

Frank

Frank S. · Answer

With all that work required,   it won't work as a rental unless you leave a large percentage of equity in the deal.

What did you allocate for roof,  bath and kitchen gut, hvac, and driveway? Are there issues with the electrical system?

Mark Bookhagen · Answer

Also, you should always request that a property like this be vacant at closing. I'm not sure if you did or not. Otherwise, your first 2 months will spent going to court and paying lawyers.

Mark Bookhagen · Answer

Investing is numbers. If you don't have a handle on your rehab numbers, take a step back and rethink the deal. There will be others. You could end up with a $120k house that you paid $150k (purchase + reno) for. Don't just do a deal to do a deal. I'm not saying the deal is bad, just that you need to nail down the numbers and then add at least 10% to the total rehab estimate for surprises (probably more like 20% in your case).