am I crazy for wanting to keep this property?

Question

its a duplex. I own it outright. it may need about 60-70K worth of work over time.

the current value is "40K" according to realtors because its a fixer upper. but its livable! and functional. even (at times), comfortable! I live in one side and a (bad) tenant lived on the other side for about 6 years. (long story) but houses on my block are selling for about 120K right now if they're finished. my property is the biggest in my neighborhood for about 2 blocks, and I think if I can get it fixed up nicely, the equity can be at least 150. I have a nice backyard , a nice deck that wraps around, front yard, about 4000 sq ft. and its a corner house. my property looks across the street at 3 other houses and covers the same amount of space as them combined.

I would like to rent it out. the rents would gross $2425 and pull in a profit of $1320 monthly if I can rent out both sides. am I crazy for wanting to keep this property?

Jonathan Greene · Answer

The reason I don't have to check the numbers is that whenever someone says "am I crazy for wanting to keep this property?" the answer is always yes. Even though it could work, you clearly have a personal and emotional attachment to the asset and this is what makes for bad decisions. Anything that is highlighted as liveable and functional needs a whole lot of work and your numbers bear that out. There aren't a ton of towns where a 40k value plus 70k rehab is going to do you solid although they do exist.

Joe Villeneuve · Answer

Here are the facts, as I see it, using the limited info you have provided:

1 - If this house is so much bigger than any other houses in at least a 2 block radius, then it will be worth 120k....just a better deal then the other 120k's in the area.

2 - You never mentioned what you paid for it.  I must assume you paid cash, and full value at that time, so my guess is $40k.  When you add the rehab cost of $70k, and then the unavoidable cost overruns, your cash in (cost) will be over $120k...probably well over that.

3 - I'm also assuming the $1320 CF does not include any mortgage.  That means your annual CF will be around $16k/yr.  This also means it will take you around 7 years to recover your cost (cash), and until you have recovered your cash, you can't start making a profit.

Dan H. · Answer

Properties at this price/rent point typically have expenses over 50% not including principle and interest (P&I) except if you are active in the management/maintenance.  Are you looking for more work?

If you are not active in management/maintenance your profit is aggressive especially seeing that you indicate it may be including some P&I.  Research the 50% rule and make sure you understand all expenses, especially cap expenses.

If I calculate at $150K worth (this is likely best case value), 75% LTV (3.25%, 30 year), 50% rule (which I already indicate is aggressive at your price points) I obtain these aggressive numbers:

2425 * 0.5 - 490 P&I = $722/month.

I believe many investors would be content with that cash flow, but as I indicate I view it as aggressive.  To lower the risk, if I use expenses of 55% then I get $600/month.  I suspect some investors would be OK with this cash flow, but most of the more experienced investors would not accept this type of return (I expect over $2K/month of total return).

It is likely not a terrible first investment and it basically fell into your lap.  If you use it to gain knowledge while making ~$600/month, that could pay dividends in the long term.

Recognize that even with the use of PM and hiring our the maintenance, rentals are not passive.  ~$600/month to cover return on investment and the work associated with owning a rental is not terrible for someone starting out.

Good luck

Joe Villeneuve · Answer

That still adds up to 70k cost to you that you have to recover first...in 7 years.

Bud Gaffney · Answer

Nope! Not crazy. Keep it :)

Bill B. · Answer

The first problem is you can’t fix it up. If it’s worth $40k now and you have to drop $70k to make it worth $135k (1/2 way between 120-145k making you the most expensive sale.) Then you lay about 10% in commissions and closing costs and you’re at $122k net. So you spent $70k if you don’t run over budget to make, you hope, $10k.

The second problem is you say with $2400 in rent you might net $1300. So you have a $40k property that costs $13k per year to own? Yuck.

Nathan Gesner · Answer

I would personally renovate and keep it as a rental. However, you're inexperienced as a Landlord and willing to keep a bad tenant for six years, so I don't know if keeping a fully renovated home would be wise. One bad tenant can eat up a lot of income!

Danny Harper Jr · Answer

very true and helpful , thank you!

Danny Harper Jr · Answer

before renting the place out im going to have to use my current employment to put 30K into repairs. after doing that, im going to get a 40K HELOC for the rest of the repairs. the "positive cashflow" figure I originally had, takes the 40K into consideration, but not the other repairs that im doing up front.

good point.

am I crazy for wanting to keep this property?

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