How bad is too bad to renovate and rent?

Question

There is a property in my neighborhood that looks abandoned (the door is bolted shut, a front window is cracked, and it's overgrown) that I have been curious about for a while because I live in a higher end area of the city. I finally looked up the tax records and found out the owner is a private real estate investor who lives out of state now. I called him and asked what he knew about the property, like how bad is it, is it vacant, how long has it been vacant, what kind of work needs to be done, that kind of stuff. He also told me that he would be interested in selling the property if I was interested in buying it and fixing up. He hasn't told me what he wants for it yet because the property wasn't listed, and he wants some time to think about it.

So my question is, how bad is too bad? Like if a place needs floor repairs the deal is good, but if it needs roof and floor repairs it's not? Seems like if you can get it for the right price and it's not condemned that almost any place could be worth it.

Details:

- This would be my first fixer, but I my family is very involved in real estate, so I'm not totally green.

- ARV Comps for this property are in the $500k-$600k range in my neighborhood.

- The guy bought the property in 2004 and it's been vacant for a couple years, but he has been checking in on it periodically.

Account Closed · Answer

@Alex Bruzda agree with what everyone else has said with one addition. Has the property been condemned by the city? It’s definitely a numbers game as others have said, but if it is on the condemned list that can be tough to reverse sometimes.

Alex Bruzda · Answer

The current owner told me the property is not condemned and that he was planning on either fixing it up himself or selling it soon. Is there a way I could check on the condemnation status myself?

Danielle Jackson · Answer

It's all about the numbers and your strategy with the property (flip vs. buy and hold). If the numbers pencil out, you are in a growth market where the forced appreciation/increased rent will be worth it, then its certainly something to seriously think about. Sounds like you may have found the worst house in a nice neighborhood....not the worst situation to be in re: valuation once renovated given the comps. Good luck!

Alex Bruzda · Answer

Definitely all comes down the numbers. I would be willing to attempt a full gut if there were enough potential profit because I have a lot of family support in the area (my father does flips).

My plan would definitely be to buy, hold and rent. My goal has always been to never* sell a property if possible. I would like to accumulate as many properties as possible. Also I think this property might be difficult to resell, but would definitely be rentable. The property is 2 bd, 1 bt and only like 550 sq/ft and on a strange lot, but in my experience, renters don't seem to care about those specific things as much.

The last thing is funding the reno. I have the cash necessary to buy the place, but I don't have enough cash to renovate the place. Hopefully because it's small, and I would just be renting it, the renovation wouldn't cost too much.

Alecia Loveless · Answer

@Alex Bruzda Something else to consider is if you want to buy and hold to rent long term or flip the property. You can afford to spend more on a buy and hold than a flip because you need to make an instant profit on a flip.

Of course you also need to take into account where your renovation funds will come from. Do you have cash on hand to pay for the reno or will you have to figure out a way to finance the deal?

This might be an opportunity for some creative financing, you never know.

Mike McCarthy · Answer

Agreed! It all comes down to the cost to purchase + cost to renovate + closing costs : compared to the after repair value (ARV) and how that looks as an investment.

For a first investment property though, I’d recommend staying away from foundation and structural issues, or serious water damage. These are items that can easily balloon time and cost if you’re not absolutely sure of the damage.

Also, if the reno budget is above $50-75K, definitely consider whether it’s a good first project. It’s of course not a hard number, but a full gut isn’t for everyone- especially if you don’t already have a good relationship with a contractor(s).

Theresa Harris · Answer

It comes down to the numbers. How much will it cost, what is the sales price, what the after reno is, how long it will take and what your plans are (long term rental, flip??)

How bad is too bad to renovate and rent?

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