NEED ADVICE! MISCALCULATED ARV!

[Marcus Robert]

Hello: I am a relatively new investor having started buying "buy and hold" rentals in 2013. I currently have two 4-plexes. One is an solid cash flower, the other, not bad however I am dumping all cash flow from both properties to fix the one with "MISCALCULATED ARV". I am very organized and have a list of priority items. I bought the house for 140k in 2014 and spent 30k already in improvements. My dilemma is that in reality, in the area I bought, the going market price for a house like this is 165k and in this particular area, houses don't appreciate much. Per my list, I am looking at a total of 190k to 210k in further improvements. On the bright side, I was able to clean out then than desired tenants and boost rent from $2300 to $2600 and have room to increase to $2700-$2800. So, given the info, I am wondering if I should sell or hold??

M.R.

[Jeff Sheraton]

Maybe I misunderstood you, if houses like yours only sell for $165k why would you spend $190-210k to rehab it?

[Marcus Robert]

Sorry, What I meant was..

Purchased for 140k

Spent 30k in rehab

Need to spend another 20- 40k which equals 190-210k total spent. Not 190-210k in rehab.

[Darrell Shepherd]

In business school they taught us about sunk costs.  Not saying that what they teach is the gospel, but basically you should analyze your situation as if it was new, not what you spent to get you there.

In your case, you've got a property that's cash flowing, but needs $45k in inmprovements.  If you can sell it for $165k net and buy another one that doesn't need the improvements then that'd make sense to do, assuming you can do that with the costs involved (commissions, closing costs) which is doubtful.

You made an error on your valuation so over paid for the property. At $2800 or so on a $200k investment you aren't in a sinking ship, though. At those numbers you are looking at a 70 GRM or so. Not ideal, but worse things have happened, 70 still works when you can borrow at 4%.

You should sell if you can do more with the cash the sale would generate.  I'm guessing you are better off staying in this one, though.  It costs $12k to sell that thing at a 6% RE commission and if the true value is still $165k you are going to take a pretty big hit.

Does it make sense to get $33k less expenses on $200k? Depends on taxes, insrurance, vacancies and repairs. The cash flow game is a cash flow game, the ARV doesn't matter much IMO. Of course you gotta take in your opportunity costs if that ties up a lot of your cash. If you over pay by $40k by making this thing nice, could you have used that money to buy 3 other properties at better multiples and appreciation potential?

No real right or wrong answer here, if it were me, I'd probably keep it if I could fund it right and the tenants weren't a PIA, but I don't have enough of the numbers to know for sure.

[Marcus Robert]

Darrell:

Thank you for the in depth! Being new at it, I was only looking at cash flow and not so much ARV. As we know, the income approach is all good, however if you based $2800.00 on a 1% rule, the cost of the building should be a max of 280k, BUT... the market says $165,000. I agree. Unless I find right investor and sold the building myself, the associated selling costs would be crazy. Numbers look like this...

2600.00-Rent Roll

Taxes, Ins and Debt Service-$1190.00

Maintenance and Utilities-$250.00

(this based on when the building is free of further upgrades and not including vacancies and reserves)

$1160 left (with 150 to 200 left to increase overall rent)

Thank you!