Cash Cow or Money Pit?

Question

I found an off market 4BR/3BR home in a 'B' neighborhood. The home has sat vacant for 20 years (yikes!) but small stuff has been addressed and maintained. The home ARV is around 450k-500k conservatively but it likely needs ~75k-100k worth of work. I still need to get an official home inspection. The home also has bad neighbors with a distressed property. The owners have a bunch of old stuff left in the house and want it out of their life.

ARV: 450k-500k

Rent: ~2,700/month

~75k-100k renovation

Plan: Buy and hold rental

Second exit strategy: fix and flip

What would you offer them? Any advice or experience for renting with an unsightly neighbor property or repairs with such a long vacancy? I expect renovations to take the better part of 1 year which eats up a lot of opportunity costs with rent.

Ultimately, I want to make this easy for the owners to sell and prioritize the relationship with them. With the market cooling, rates increasing, and the high renovation costs, I feel that I may be in a position to make a creative offer with seller financing that gets them paid monthly with less money down up front for me. Thoughts?

Marshall Leipprandt · Answer

@Grant F. I love Fort Collins, but this deal sounds risky. Is this your first deal? Remember, you can change everything about a house except for location/neighborhood. If the neighbors are bad and are living in squalor, that is really going to hurt your ability to rent this property to quality tenants as well as hurt your possible future value if you choose to sell. If there is no sign of them leaving in the near future, I personally wouldn't put up with the headache.

Also, if it's been empty for 20 years, I'm going to guess that your official inspection will expose some serious issues beyond what you're already aware of. That is a long time for the major components and systems of a home to be neglected.

Account Closed · Answer

Will people pay the $2700 a month with those neighbors next door? I would sit in my car down the street and see what kind of action is happening in the neighborhood, If it's a quiet area that's one thing, if the house next door has people coming and going all day that's quite another. (drugs, etc)Are you borrowing the renovation money? If so, the lender will require certain things depending on who is doing the lending. You need to find out if they will lend on that property. If it's your cash and there is no underlying loan on the property, I'd go for seller financing.I'd start with ARV minus repairs minus carrying costs minus cost of sales minus profit. So, roughly $450,000 minus $100,000 minus 6% for real estate agent so, minus $27,000 minus 10% - 15% profit so minus $45,000 - $65,000 and divide the remainder by 360 months for a monthly payment (interest free) . You pay taxes and insurance, haul everything away, they don't ever have to visit the property again, no hassles.If there is a loan on the property I'd take over the loan and make the payments. It's called Subject To. Make sure you have a Title report done so you know for sure they are the owners and that no liens are on the Title or it hasn't been condemned by the city, that kind of thing.

It may seem like a low offer number to you, but you are presumably running a business and need to make the effort worthwhile and mitigate risk.

Grant F. · Answer

I am open to trying! This would make the payments very doable. Thanks for sharing-real estate is inspiring and exciting to me. Ya'll rock!

Account Closed · Answer

Your comment: "I would think I would need to offer 5-6% interest on the money and pay interest as well as principal but may be misunderstanding your point."That's all in your head :-)You always offer the 1/360th of the amount and if they accept it, it is interest free. Most people don't care about interest, they aren't banks. And if they do bring up interest, then you negotiate the interest rate. Don't put thoughts in their head that aren't necessary, complicate the deal and aren't expected.I typically get interest free money.Here's an example I just did:

"Just Bought A $750k House for $100 Down - $680k Total -Off Market"

https://www.biggerpockets.com/...

Grant F. · Answer

Account Closed Thank you for your thoughts, I appreciate it. I'll let you know how this progresses as it is still early in this process. I am going to meet with the owners when they're back in town. I am definitely cautious right now and see it as an exciting possibility but I'm not expecting anything. No real downside for connecting with the owners with a possible large upside. I'll have to check in on the street at different times.

They own the property free and clear. I would be borrowing from a HELOC for part of the renovations and paying cash for money down. I was thinking I could do low money down, 5-6% interest with a delay in starting monthly payments for ~6 months (for renovations) as a way to hedge against some of the risks and stop the bleeding so to speak. Account Closed good point about the rent likely being lower...if I wanted to make this happen maybe I would have to ask them for lower rates as a result and factor in under market rents by about 15% or 20% for the lousy neighbors. I will make sure to do my due diligence with the title/inspection/etc and to be conservative with rent estimates and time frame for renovations.

Mike, are you suggesting I could pay only principal with no interest for the terms? Based on your formula it looks like it would be ($278,000/360 months)=$772/month to ($298,000/360 months)= $827/month principal only. Can you elaborate at all? I would think I would need to offer 5-6% interest on the money and pay interest as well as principal but may be misunderstanding your point.

@Marshall Leipprandt yes I've been looking for local deals for awhile and this would be my first investment property. I just kind of fell into it through my daily network of people I see. It might be that I need to make a very low offer that is well within my ability to pay or depending on the inspection report, just walk away. It does blow my mind this place has sat for two full decades. A real time capsule.

Cash Cow or Money Pit?

Most Popular Reply