My First Investment-DEAL OR NO DEAL?! :)

[Courtney Rollins]

MY FIRST INVESTMENT-DEAL OR NO DEAL!?

I'm so grateful to the BP community. The many generous and knowledgeable people and resources are a blessing to a newbie like me. I was just introduced to the world of real estate investing ,like so many of us, after reading Rich Dad Poor Dad in a book club this past December 2018. It light a fire in me and I've dove in reading everything I can get my hands on, attending the Maryland REI meetups, meeting with several local investors in Baltimore, and of course soaking up as much of what BP has to offer.

After making several offers on several places this past month, I’ve had one accepted and is now under contract. It is located in a class c neighborhood in transition located in an opportunity zone in southwest Baltimore (Union Square neighborhood). My partner and I plan to live in it for 6 months - 1 year then will turn it into a rental. We expected to put in about $3,000 in repairs during this time. However, the inspection report indicated that there are foundational issues that could be serious or minor (whatever that means) and the roof also needs attention. We plan to go back to seller and ask for reduction in price or to repair issues, but we want to plan for worst case scenario. However, the biggest issue is that we are currently renting and our lease is up by Feb 28! Which means if we don’t close on this property we will need to rent. I don’t want to rush into my first deal that will be a money pit, but I also don’t want to go back to renting in March. Either way, it continues to be a great and anxiety inducing learning experience. Thanks for any advice or insight!

Here are some of the numbers.

• 4 Bedrooms 3.5 bathroom row house
• Under contract at $109,900 purchase cost
• Comps & ARV $126,000
• Conventional loan at 20% & 5.8% interest, 30 years
• Full seller’s help
• Initial estimated cost of repairs: $5000 (however now unsure due to foundational and roof issues)
• Anticipated cash flow: $284

Major issues:

• There was significant ponding and evidence of leakage on roof. Additionally, there are a number of areas that require re-sealing (at chimney and vent boot in rear, and at unused plumbing vent that dumps into ceiling below).
• Needs caulking/sealing throughout exterior, particularly around windows and doors.
  • Windows in rear are trimmed without appropriate materials, or not trimmed at all.
  • Additionally, there is evidence at a number of windows of moisture penetration.
• There is significant deterioration of framing members in basement ceiling has led to a moving and sloped floor above. Walls have moved and previous repair was inadequate and unprofessional. I think I need a structural engineer/licensed professional to evaluate and repair floors under kitchen and common living areas on 1st floor. 

[Nick Bennett]

Hi Courtney,

I'd first say that to give/get an answer here of "what to do" would go against my belief of how we learn, "we fall to learn to pick ourselves up" Falling doesn't feel good but its not supposed to...it encourages a better outcome the next time around. So ultimately keep in mind you need to make this decision.

This sounds like a lot of first deals! back against the wall and suddenly a major issue (potentially).

I've walked away from several deals that had signs of issues with major unknowns such as the one you face, I'm not suggesting that this is 100% the direction you should go. I encourage you to ask the following questions of yourself/ the deal like I did, and hopefully arrive at your answer.

Before you did anything- I'd find a contractor NOWWWW and get the estimate. I mean like right now, stop reading. No point racking your brain if you cant afford to do it.

1) Do you have the cash funds to facilitate the repairs? If not the answer is simple

2) Do the repairs add value- Ex. if you get a lower price as a result of the issues they may in fact add value, but if not then maybe they are just sunk costs.

3) Is the cash flow + anticipated appreciation a good return on equity? example.... a lot of people look at ROI, I like to look at deals as an ROE (return on equity)... If you purchase the property at say 100k after negotiations, sink 5k in to it and its worth 126K with $284/month cash flow your ROE is ..1.1% (20k down + 5k in repairs and upgrades plus the $1000 in equity). Lets say the property value was now 140k, thats .007% ROE (140k-100k owed = 40k equity...that 40k is generating $284/month so you take 284/40k. Now this equation has a variable if you add in appreciation. At that rate you'd be better off selling the house for the profit instead of holding it. I'd rather take the 40k and buy two more houses that are the exact same as the one we are talking about and double my income.

4) Whats the long or short term plan for this property? How long are you going to live in it? If you live in it for less than 2 years in a 5 year span and sell your looking at capital gains taxes unless you do a 1031 exchange.... some people leverage this incentive so you need to determine where you fall...or are you keeping it for 30 years?

5) Does moving in to this house SAVE you cash flow from your current living situation....for the equation above lets say your current rent was higher than your future mortgage payment...you'd add those dollars in to the equation monthly to increase your ROE.

Nick