[First Post] Newbie Rehab to Rent: Is it worth it?

Question

Hello,

First time poster, long time listener.

I have a tiny bit of experience but have never bought a home/taken a mortgage out in my own name. I put some cash down on a friend's investment earlier this summer and we were fairly successful. I decided to look into getting a mortgage/203k and doing it myself. My friend's agent sent him a good lead, a shell in OK shape zoned Multi-Family near a University (hood adjacent) on the outskirts of Philly, PA.

I'm very close to putting the building under contract, waiting on contractor bids, have secured a 203k FHA lender who tells me I can borrow a good amount due to projected rental income once converted into units. I've spoken to my mother(who's an interior designer w/ 30+ years of experience buying/remodelling), multiple contractors, investors and lots of people with experience - they all tell me my margin of error is very high - I would have to be seriously unlucky or very dumb to screw this up.

That said, I'm still scared "witless" and am extremely nervous to sign a contract - I'm supposed to receive a contractor bid (from a 203k experienced contractor) and nervous that I'm putting myself in a tough position. I know that realistically my "worst" case scenario is probably still better than "losing" money to rent like I currently am.

The price I'm getting the building for is low, but the rehab required will be fairly extensive. My friend has offered to help pay my down payment (on loan against the 'shares' of the building I went in with him on) and my lender tells me I have a good amount of wiggle room in how much I can borrow for 203k.

Assuming the contractor bid comes in semi-reasonably priced, and there are no giant red flags I'm missing (toured it 4 times, 3 times with professionals, everyone has good things to say: it can't be that bad because it's a shell and there's nothing majorly wrong with 'the bones') should I still be scared?

Given I have more resources than the average newbie (lots of experienced people helping me), does the BP community think my rehab-rent scenario is too perilous or am I being chicken given that so many of the "red flags" are covered?

Anthony Dooley · Answer

Knowledge conquers fear. Getting advice from experts is a very smart thing to do, but they are not on the loan. The advice should reinforce what you already know. If you don't know, but base your decision on the advice of others, you will be standing alone if it goes to crap. Fear can be a good thing. It keeps us from running into traffic.  Fear of the unknown simply means that you need to learn what you don't know.

Jonathan Klemm · Answer

Sounds like you are about to put your self in analysis paralysis.   Everyone is nervous on their first deal!  If you have walked in with numerous professionals and they all have good things to say what are you waiting for?  Sign the contract and get it done before someone else does!

David Baer · Answer

Thanks everyone for your input. I'm pushing forward and signed a contract, but keeping things like schedule, total costs and as many other things possible in the back of my mind.

Now I just need to find a reasonable 203k contractor, no small task!

Sam Shueh · Answer

Unless you have the cost analysis in front like others, it is close to impossible to determine what the margin of error, cost, material is.  Watch out your schedule slippage as it can take twice longer than you projected.

The construction crews work in the winter?

Derrick E. · Answer

@David Baer   ITS TIME TO JUMP!

Nicholas W. · Answer

Move forward!

You've done your research, you know your stuff, now take the chance. What's the worst that can happen? It will be stressful and it won't be easy but you'll figure out how to deal with whatever comes your way and you'll make it happen.

In a year you will wonder why you ever doubted yourself and you'll be looking for your next deal.

Vincent Priore · Answer

@David Baer

Have to agree with @Jonathan Klemm here, it is very possible to get yourself into analysis paralysis.  That said, you should be as thorough as possible and try to anticipate every scenario.  I will tell you from my own personal experience, both as an investor and GC, there is almost always something unanticipated on every project, no matter how bare bones the start is.

I'll give you an example.  We bought a big three family over the summer that was a full gut, there was nothing in the house except for a bunch of garbage.  No pipes, no wiring, nothing.  Foundation was in great shape, so we assumed we'd take it to the studs and start with our roughs.  As we were doing demo, we noticed the rear of the building was swaying...long story short, we had to re-frame the entire back half.  And when we removed the existing siding, all of the wood came off with it, so add 100+ sheets of plywood (and labor).  All that said, I'd still do the deal again.  We bought it well and built in contingency.

You will encounter issues on every project, and if you have one that goes exactly according to plan, consider yourself lucky.  But that's what this business is all about and why you NEED to buy right upfront.

Best of luck

[First Post] Newbie Rehab to Rent: Is it worth it?

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