Houston Heights deal analysis help - is cashflow dead?

[Michael Yu]

Hello Houston locals! 

I’m looking for feedback regarding how I can better structure this deal to make it cash flow or not lose money every month without too many sacrifices.  

My partner owns a property free and clear in the Houston Heights. He wants $60k during the cash out refi/sale and the goal is to use this property’s equity or proceeds to buy and hold more properties. 

Ideally, we’d like to hold and cash out refi, but with property taxes and the amount of rehab it needs, I’m having a hard time making the numbers work unless we go interest-only on the loan. To me, that’s a negative but maybe this is what they mean when they say your first deal doesn’t have to be a home run.

Property Snapshot:

• 1920 Bungalow
• 1000 sq feet/6000 sq feet lot
• Rehab cost $75k 
• Foundation needs leveling (Pier & Beam) 
  
• Needs new roof
• Needs central HVAC
• Needs additional square feet to convert into more useable 3bd/2ba

Deal Snapshot:

• Purchase Price: $60k (paid at time of cash out refi/sale) 
• Rehab: $75k
• ARV: $420k
  Estimated Rent: $2000 - $2200

With 5% on R&M, CapEx, Vacancy and 10% on PM plus taxes and insurance/flood insurance I am barely breaking even - and that's without even any "play money" for the next property, only repaying the $75k rehab costs and the $60k that the partner needs for personal expenses.

Now, we can cash-out an additional $100k in play money, but to stay at par it would be interest-only. Is all this work worth $100k in cash out, with zero cash flow and zero equity pay down? 

I feel like I am missing something? It seems property is almost “handed” to us in a great area. 

Negatives

Additionally, we are basing this of a NONI (Non-owner, no income doc) loan as we aren’t able to show much history (recently started business). Rates are 4.5% at best. 

Positives

Immediate area has good amount of same sized lots with newly developed duplexes and triplexes that are selling between 700k - 1m. This won't help much as the issue doesn't lie in the LTV being too high, but rather the loan amount vs rent.

Some “creative” ideas:

Adding a 1bd/1ba guest house in addition to main house rehab. No comps yet on this strategy, but wanted to ask if there is demand for that type of living in the Heights? In Los Angeles, guest houses fetch close to apartment prices, sometimes more. Assuming $100k to build and $900 in rent, it would allow for principal & interest pay down, in addition to the $100k cash out as well. 

Total demo & rebuild something like 2 luxury townhomes (4bd/4ba) which is what is popular in that neighborhood. It's outside my current wheelhouse and research, but maybe my situation doesn't work for BRRRR?

Appreciate your time and feedback in advance! I’ll also be in Houston next week if anyone local wants to meet and/or see the property.

[James Polk]

@Michael Yu

@Michael Yu

Hi Michael,

I am a local Houston investor, a financial advisor, and i worked as a GC several years. We have 5 rentals and 3 of them my wife manages as STRs. My net cashflow increase on going to STR has been about 600 to 800. It is a lot of work getting them setup. It has been enjoyable. I would suggest 2 strategies:

1) Run it as a STR, i think conservatively on a good rehab i could gross $3500 in the heights. That should have you cashflow positive.

2) Sell it. Those are flip numbers. 135k + 30k (holding and closing costs on 420k)=185k. 430k-185k=245k. Purchase four 250k houses with a 20% down loan. You'll ahppreciate on 1million real estate and it will cashflow better than a 300k loan in the heights.

I would be interested in seeing the property. Sounds like a deal to me. You can pm or connect with me.

James Polk