Would you go through with this deal?

Question

So I made a mistake with a PA on a duplex that needs rehab and misunderstood how much time I had for due diligence. It needs a moderate to heavy rehab and initial estimate was 35-45k. Actual estimate was higher then we add a contingency budget of 20% on top of that. Purchase price is 101,500 with a very difficult ARV to analyze. There haven’t been any rehabbed properties in the last 6 months in this area. Our best estimate is between 165-185k. Smaller duplex 3 houses down that is not rehabbed but in decent condition is 165k on MLS now. Duplex under contract has both units 3/1 with access for shared laundry in the basement and off street parking. This is a C area of town that is up and coming with a multimillion dollar commercial property half a block away. Market rents likely $1350 up, $1400 down, back up plan is section 8 voucher at $1291/unit. Financing is 80/20 for purchase price with business line of credit at 5% for the rehab and the plan is the refi to pull out what we can. Would you do this deal or walk away giving up the $1000 EMD?

CJ M. · Answer

@Matthew Tanis

What is your projected cash flow? (Show the calculations).

If I'm reading this correctly, you will purchase for $101,500 (plus whatever closing and holding costs you incur on top of that), and have $45K in rehab plus another $9K in contingency (assume it'll get used). My guess is, when it's all said and done, you'll end with a property that is basically worth what you paid/invested into it...which probably isn't a good deal...unless you're banking on some super accelerated appreciation, which is risky in itself.

Jason Turgeon · Answer

@Matthew Tanis make it easy for us. Don't make us scroll up and down piecing together clues.

Purchase price: $101,500

Rehab: $75,000 (what does that include?)

ARV: $165-$185k

Projected rents: $2600/month?

Mortgage 402.21 (what terms/rates?)

Taxes: 250 (will these go up after rehab?)

Insurance: 83.25

Vacancy (5%): 82.50 (is 5% realistic for your city?)

Repairs (5%): 82.50 (I generally budget a bit more)

Cap Ex: 182.78 (If you've just put $75k in what capex do you anticipate?)

Water: 83.33

> That leaves $1166.46 positive cash flow per month if I use $1300 per unit for a total positive cash flow of $17,202.48/year. We would then have to subtract out the rehab line of credit and payments from thatAssuming you're putting in $25k in down payment and closing costs, plus $75k in rehab, $17k is still not that bad. That's 17% cash on cash.

But further assuming that you put in $25k down/closing, have a line of credit for $75k that finances the rehab, and eventually refinance out at your lower ARV of $165k * 80% ($132k) at 4.5 %, you have ~$48k in the deal and a monthly PI of $669.

If I piece together what you've told me and plug it into this calculator, I get some pretty outstanding returns on investment. Provided you have the cash and the numbers are accurate, I would definitely be interested in this deal. But it doesn't include property management, and it only has 5% vacancy, so I might want to be more conservative. Still, I think you're in the right ballpark.

The bigger question is repairs. Are you sure you can keep to $75k? It's easy to blow through cash. I've done 3 rehabs, and not one of them has been on budget, or even within 20% of budget. If you spend $100k on the rehab and the place appraises at $180k, do your cash flow projections make up for it?

Matthew Tanis · Answer

I should add that the vacancy and repairs should be a bit higher as this was calculated on a much lower rent to run things more conservatively.

Matthew Tanis · Answer

So the total rehab is going to be 75k which includes our contingency budget of 20%.  This is an old house and we want to make sure we have the cash on hand in case things go awry.  Projected cash flow is very strong:

Mortgage 402.21

Taxes: 250

Insurance: 83.25

Vacancy (5%): 82.50

Repairs (5%): 82.50

Cap Ex: 182.78

Water: 83.33

That leaves $1166.46 positive cash flow per month if I use $1300 per unit for a total positive cash flow of $17,202.48/year.  We would then have to subtract out the rehab line of credit and payments from that, would refi in 6 months to pull whatever we could to throw toward the line of credit but would likely have to leave some money in the deal and won't be able to BRRRR it completely.

My ultimate plan will be to renegotiate, but I know that he had another offer on the table.  My hope is that with the numbers and the letter from our lender explaining why this won't work that he will negotiate with us, but no guarantee there.  Thanks for all of the replies.  I appreciate your time and assistance!

Tchaka Owen · Answer

@Matthew Tanis - have you considered renegotiation? Based on what you're staying, if you're going to be all in around $160k and it's pulling in close to $1300 per side, that's not a bad deal. That said, there's nothing wrong with going back to the seller and saying that the rehab budget is considerably higher than anticipated. Unless people are jumping at his door to buy it, s/he might work something out. Even if it's $5k less, that's a new kitchen. Good luck!

Nik Corbaxhi · Answer

@Matthew Tanis, this comes down to what you want to do with it. From the numbers, does not make sense for you to sell it. I am not clear whether the rent you are talking about is for both combined units or each of them renting for $1300-1400? If combined, it is not a good deal all together. you will have a hard time selling it at 165k as you are not even close to the 1% rule.

Good luck.

Jon Reed · Answer

I may have just missed it but what is the actual renovation estimate? Is it 20% higher than the 35-45K?

Would you go through with this deal?

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