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

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

Courtney Rollins
Wholesaler · Durham, NC · Member since 2018 · 157 posts · 50 votes

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. 
1Reply
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Nick BennettPro Member
Mashpee, MA · Member since 2018 · 56 posts · 21 votes
7y

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

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  • Mark Cruse
    Investor · Fort Washington, MD · Member since 2014 · 1k+ posts · 1k+ votes
    7y

    The repairs already put you past the ARV. Is the goal to hold it a very long time? Is someone living there now? Do you know the situation with the lead?

    1Reply
  • Nick BennettPro Member
    Mashpee, MA · Member since 2018 · 56 posts · 21 votes
    7y

    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

    2Reply
  • Courtney Rollins
    OP
    Wholesaler · Durham, NC · Member since 2018 · 157 posts · 50 votes
    7y
    Originally posted by @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

     Hi Nick,

    Thanks a ton for the insight! We're reaching out to contractors and hope to have estimates by Monday. My partner and I have budgeted $5,000 in repairs. However, we have considered living in the property, building up equity, and making repairs over the next 3.5 years after which it would become a rental that we plan to hold onto for the duration (unless of course factors make us switch strategies.) During that time, we would save funds, take out a HELOC, and invest in other properties. ALL of your questions have been a tremendous help. It's #5 that is so compelling to me. We simply do not want to spend another dime renting and thought worst case scenario we have a property that we keep and rehab over a long haul in a turning neighborhood that we could cash flow and leverage in the future for future investments. Thanks again, Nick!

    0Reply
  • Courtney Rollins
    OP
    Wholesaler · Durham, NC · Member since 2018 · 157 posts · 50 votes
    7y

    @Mark Cruse Hi Mark, thank you for your response. We plan to hold on to this property as a rental. Over the years we would like to leverage the equity we have an invest in other properties as well.

    0Reply
  • Nick BennettPro Member
    Mashpee, MA · Member since 2018 · 56 posts · 21 votes
    7y

    @Courtney Rollins keep us posted!

    0Reply
  • Lynnette E.
    Rental Property Investor · TN · Member since 2018 · 2k+ posts · 2k+ votes
    7y

    It looks like the numbers are way too close for the amount of repairs and the risk of those repairs.  For example seal around a leaking vent pipe in the roof may not be sealing at all, but replacing the wood and reroofing the area .  With a leak the material/wood around the vent pipe may very well be rotten.  

    The list has a lot of these issues--if all goes well not a big problem, but it could be a very big expensive problem.  

    I think it is better to rent month to month for 2-3 more months, what $3-6k?, and find a better deal than to dump $20k more into a house than the market can take.

    I'd want at least $20k lower price to be in any way moving forward on this house.

    1Reply
  • Quito Keutla
    Real Estate Agent · Renton, WA · Member since 2017 · 204 posts · 151 votes
    7y

    @Courtney Rollins Congrats!! On taking action use the repairs as leverage to renegotiate to a number that works for you and if not find another one. What I’ve found is taking the emotion out of the equation. I know it’s tempting to want to jump into your first deal, be patient. Happy Investing!!

    2Reply
  • Courtney Rollins
    OP
    Wholesaler · Durham, NC · Member since 2018 · 157 posts · 50 votes
    7y

    @Quito Keutla Thanks a ton! This adventure is exciting. Thank you for the encouragement.

    0Reply
  • Courtney Rollins
    OP
    Wholesaler · Durham, NC · Member since 2018 · 157 posts · 50 votes
    7y

    @Lynnette E. Thanks! I'm just so eager to get going. I do need to take the emotion out of the equation.

    0Reply
  • Lynnette E.
    Rental Property Investor · TN · Member since 2018 · 2k+ posts · 2k+ votes
    7y
    Originally posted by @Courtney Rollins:

    @Lynnette E. Thanks! I'm just so eager to get going. I do need to take the emotion out of the equation.

     You are learning a lot from this deal, so it is a good place to be and a great step in your education.  If the seller does not want to significantly drop the price you will be better at looking at the next deal.  And you will get one that you can know out of the park!  Better to wait and get that deal than one that knocks you for a ride.  

    Think of Kenny Rodgers "know when to hold and know when to fold"  it a good lesson.

    And you are doing great.  You are asking the right questions.

    1Reply
  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    7y

    @Courtney Rollins Does this house have exposed brick and on a 1700 block? Then it looks very good in the pictures but I suspect the workmanship when renovated is not particularly good.  The 1700 block is pretty far west on that street and the neighborhood gets pretty bad at Fulton. 

    I think you are going to need more than $5,000 to fix, if the floors are uneven. The roof issues are not a big deal but they will cost you some money. On the surface it looks like an OK deal but it is not a really great deal.

    0Reply
  • Jared Forman
    Rental Property Investor · Philadelphia, PA · Member since 2017 · 139 posts · 107 votes
    7y

    Not trying to scare you, but this is just my view and opinion.

    1. Foundational issues, did the house settle or does it actually have structural integrity issues. You might want to get a structural engineer or someone who has more knowledge than yourself in that field. 

    2. A bad roof, the problem isn’t just going to be your roof. Gravity forces water to travel down the building and it destroys anything in its way. Look at the Grand Canyon.

    3. If the seller has allowed the property to have these problems then it tells how much he cared about the property. Go to the basement and look at the electric wiring, look at the plumbing, and HBAC. Do your lines look go through the rafters, do they look straight? This is an easy way to tell if the properties PEH was installed right.

    4. Rather than asking the seller to make repairs have your contractor write and invoice for the work. Ask the seller to put funds in escrow at closing, add 20% to contractors estimate. You will probably spend 20% more guaranteed if it is your first house. If there are left over funds return them to the seller.

    2Reply
  • Michael Ealy
    Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes
    7y
    Originally posted by @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. 

    As others have said - this does not sound like a deal.

    A deal that you will live in (and eventually rent out after a year) should look like this:

    Purchase price = 90% of ARV - Repairs (for minor repairs - i.e., less than $10,000)

    You got to have at least 10% equity or discount to market value. Why? Because, at minimum, you have other costs like closing costs to factor in so if you're not buying a property with at least a 10% discount, you're paying MORE than market value.

    If it's a straight rental deal, then aim for at least a 20% discount. If it's a fix-n-flip, aim for 30% discount.

    The above formulae hold true for properties priced between $70,000 to $250,000.

    Rent for now and don't rush in.

    There are better deals out there.

    1Reply
  • Courtney Rollins
    OP
    Wholesaler · Durham, NC · Member since 2018 · 157 posts · 50 votes
    7y

    @Michael Ealy

    I really want to jump out of the plane and build the parachute on the way down, but I'm thankful for the advice I received from you and others so far. My fiance and I have decided to rent out an Airbnb for three months at a discounted rate and to continue to make offers and find a better deal. Thank you everyone! The BP universe is as amazing as folks said it would be.

    1Reply
  • Courtney Rollins
    OP
    Wholesaler · Durham, NC · Member since 2018 · 157 posts · 50 votes
    7y

    @Jared Forman thanks, Jared. We are going to continue looking for properties and just put in a request for a temporary Airbnb stay at an extremely discounted rate. Thanks for the advice.

    0Reply
  • Courtney Rollins
    OP
    Wholesaler · Durham, NC · Member since 2018 · 157 posts · 50 votes
    7y

    @Ned Carey

    Yes it's on the 1700 block. We were concerned about the Fulton Avenue reputation. We will continue to look and hopefully find a property closer to the Highlands Market and Union Square intersection that is not all Fulton Ave. We decided to rent out an Airbnb at a very discounted rate until we find the right deal that fits our profile and needs.

    0Reply
  • Courtney Rollins
    OP
    Wholesaler · Durham, NC · Member since 2018 · 157 posts · 50 votes
    7y

    @Ned Carey and thank you so much for your generous advice. I've learned a bit from other post you have shared with other newbies like me, too.

    1Reply
  • Adeva Edobor
    Banker · Huntington Beach, CA · Member since 2018 · 99 posts · 100 votes
    7y

    @Courtney Rollins I agree with @Jared Forman about checking out the rest of the property because the previous owner has already shown negligence by allowing that degree of damage. Also, I think you should look at alternative short term rentals. Airbnb may not be the most cost effective since you are not too excited about renting. You will most likely pay more than you would with a traditional month to month rental.

    Also any concern with structure in a building is a huge red flag. For your first time, I wouldn't recommend trying to deal with that.

    1Reply
  • Kelly Iannone
    Rental Property Investor · Orlando, FL · Member since 2018 · 301 posts · 354 votes
    7y

    @Courtney Rollins have you talked to your landlord? Is it possible to extend another month or to? Go month-to-month the give proper notice when you have a deal to close (don’t want to rush into anything). Talk to them soon as you’ll have a better chance for flexibility with notice and if they have not already rented it after you leave. Land loaded prefer late spring/summer turns so you may do them a favor staying another month or two.

    1Reply
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