Discounting for Immediate Renovations and Repairs

[Seth C.]

When looking at an investment with value-add rehab, obviously we need to take market cap rate and discount for the actual costs of repairs. But there is no reason to take on the risk, time, lost rent, and work for the same return as a turnkey.

My question then is how much do you discount and how do you phrase that discount? That is, do you discount x dollars, or require a better cap rate, etc., and how much? It obviously depends on the work required, but some typical scenarios would help!

[Pat L.]

I watched an 1890's farmhouse come duplex listed for $89,900 for 18 months. With an 800 ft deep double lot & a huge barn in disrepair, it had two 3 bed/2 bath units but in pre '70's disrepair.

I watched it drop to $69,900 & sell subject to financing which I knew it wouldn't pass. The seller had finally put in new low end furnaces & small HW tanks leaving the old stuff in the basement.

When it dropped to $55,000 & his tenants finally left we walked in & offered $40,000 cash, close in 30 & we were told to leave ... 10 days later we were asked to raise it to $45,000 & we had a deal. Flipped it to a fellow investor & hold the note @ 12%. The investor rehabbed it for $25,000 & it's now definitely worth $89k.

In fact he just got a $10k insurance payout for the Barn that was seriously damaged by the last winter & ice.