Third Project Complete - How'd we do?

[Stephen Chittenden]

Our third project was another single-family home in Havre de Grace, MD. This home was originally listed at $115,000, but we were able to negotiate the price down to $81,900 (about $85,500 after taxes, fees, and realtor costs). The house is a 3/2 with about 1700 square feet of living space.

Our rehab budget was about $50,000, including $12,000 for two bathroom remodels, $5,000 for a kitchen remodel, $9,000 for a new roof, $10,000 for HVAC and plumbing, with the remainder for carpeting, flooring, painting, and appliances.  So, all told, we expected to be in for about $138k. The ARV was expected to be $185-200k. Monthly rent was expected to be $1400-1600.

Here are some before pictures:

How did we do?

Well, the rehab went over budget. However, given our last single-family rehab went 90% over budget, this was easy. A gas leak, hidden plumbing leaks, and a failed sump pump put us over budget. The biggest extra expense though was having to replace the flooring throughout the first floor. The laminate that we hoped could be saved, could not. We also made the decision to replace the flooring in the downstairs bathroom because we weren't happy with how it looked after we cleaned it. We made some sacrifices, forgoing a planned jack-and-jill bathroom upstairs, some leveling of the concrete basement floor, and ceramic tile floors and surrounds in the two bathrooms. The changes worried us and made us concerned that we would not be able to achieve the ARV we hoped for and might end up with more trapped cash in the property.

Between the extra costs and our compromised design, we ended up over budget by a little more than $2,000.  That's unfortunate, but only about a 4% overrun.  We lost a couple of months between the gas leak delaying getting the HVAC operational (which pushed back paint and flooring) and the flu coming in and taking out the entire crew.  Fortunately, having paid cash for the property, our holding costs were pretty minimal, so the delay didn't cost us much cash out-of-pocket and had the benefit of pushing us out into prime rental territory.  The place was rented after being on the market for two weeks and the tenant began occupancy on June 1.

Some after pictures:

The Cash-In Numbers

Purchase Price: $81,900

Closing Costs on Purchase: $3,600

Rehab: $51,700

Holding Costs (Utilities): $500

Total Costs: $137,700

Financing

We are closing a loan with a local credit union. Because the property is owned by our LLC, it is a commercial real estate loan. It is a 5/5-ARM with 30-year amortization at 5.5% interest. Total closing costs and taxes on the loan are expected to be about $5,000 (still waiting for the final numbers). The lender was only willing to finance $130,000 or 75% of the appraised value, whichever is less. In the future, I think they will be willing to go up to our actual cash outlays, but because this is our first loan with them, they did not want to go above $130,000. There initial over was for $125,000, but we were able to negotiate the higher loan amount due to the strong credit and income of the LLC's members. Assuming a $130,000 loan amount, the payment will be $738 per month for the first five years.

Appraisal

We got the results of the appraisal this week.  We had hoped for $185,000-200,000.  It wasn't what we hoped for though... it was better! The appraisal came in at $204,000.  That will allow us to finance the full $130,000.  That leaves us with about $12,700 invested to control an asset worth over $200,000.

Rental Numbers

We signed a two-year lease at $1,475 per month.  The tenants are a nice couple, and the wife is a school teacher at the nearby elementary school who can walk to work.  We expect they will stay the two full years, avoiding the need to find a new tenant right away.  We pay our property manager 8% per month plus the first month's rent.

Rent: $1,475

Management Fee: $118

Mortgage: $738

Insurance: $95

Taxes: $150

Vacancy: $120

Maintenance/CapEx: $150

Net Cash Flow: $104 per month

Cash-on-Cash Return: 10%

All-and-all, I call this a rousing success.  What say you?