To rehab or not to rehab...

Rehabbing & House Flipping
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To rehab or not to rehab...

Chris Jackson
Investor · Chambersburg, PA · Member since 2016 · 108 posts · 23 votes

Well - my first dose of reality. My first dose of fear.  And excitement.  But mostly fear.

To rehab or not to rehab.  That is the question.

$60K gets me into a duplex.  Half is fixed up and rented (has been for 2 years), half is this.  A bombshell.  Missing plaster, floors and walls; but full of dead animals, leaks and holes.

So help me out in conquering my fear and putting it back into a mathematical equation. Math isn't scary - it either makes sense or it doesn't.  

Owner is asking $70K I might be able to get that down to $60K.  A 30-yr fixed loan at $75K (60 + 15 for commission, closing...) is $390/mo.  The monthly rent is $600.  I do not want to do the work myself; I'd rather get somebody who knows what they're doing to fix it up. I'm thinking that I might break even month-to-month from the rented side - but is it going to cash-flow so that I can put reserves aside for doing work?  I don't have much money to put into the property myself so I'd have to get another loan to do that and then I'd be cash-flow-negative.

What would YOU do?  Walk away from the deal or get creative?  

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Brian Smith
Rental Property Investor · Shreveport, LA · Member since 2015 · 36 posts · 18 votes
10y

Is $600 the expected market rent on both units? If the answer is yes and the rents can't be raised then the answer is WALK. If you add in 20k in rehab, lawn, snow, any common utilities, and 2 kitchens... seems like a daunting task to make those numbers work. If rents can be raised with a decent rehab then maybe so. Don't try to force these numbers to work if they don't, because another deal will come around and maybe passing on this deal IS the lesson you're needing to learn on this property. Every property is a chance to learn even if it means passing it up.  Just my .02

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  • Jarred Sleeth
    Investor · Austin, TX · Member since 2014 · 144 posts · 84 votes
    10y

    It sounds to me like you don't have the capital to take on this kind of deal without a ton of risk. If you're going to pay 60k for it, you will still have to put money down and it sounds like you're trying to borrow your closing costs?  Have you purchased property before? You may be misunderstanding how the numbers are going to work.

    I think the best scenario would be to get a construction loan to fix up the other side, and then move into it.  Look into getting a 203k loan, there are plenty of threads on BP about that.

    Good luck

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  • Chris Jackson
    OP
    Investor · Chambersburg, PA · Member since 2016 · 108 posts · 23 votes
    10y

    this will be my first purely investment property, yes. And you're right that I don't have capital to put in too. The 203k won't work because I do not intend on living there at all. Not sure what other options I have for construction loans, but borrowing too much will certainly cause me to be negative cash flow until I get a second renter in there

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  • Chris Stone
    Investor · Albuquerque, NM · Member since 2015 · 29 posts · 9 votes
    10y

    Why is the commission and closing so high? Doesn't the seller pay commission? 

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  • Valerie Hodges
    Investor · Canyon Lake, TX · Member since 2016 · 11 posts · 1 vote
    10y

    HOW DO YOU REALLY CALCULATE YOUR RENOVATION BUDGET? I AM STILL TRYING TO GET MY FIRST CONTRACT/DEAL. BUT, THE ESTIMATED COST OF REPAIRS ON LISTINGS, APPEAR TO NOT BE EVEN CLOSE TO A REHAB PROJECT AND WITH A 20%  PROFIT. OLDER HOMES PRE-1960's NEEDED ELECTRICAL UPDATING AND ALMOST ALWAYS HAVE VERY BAD WATER DAMAGE, TO INCLUDE MINOR MOLD. WAY MORE THAN STATED

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  • Charlie DiLisio
    Investor · Lake Worth, FL · Member since 2014 · 378 posts · 184 votes
    10y

    What Jarrad said. FHA 203 k loan is your best option in my opinion. Unless the owner is doing the loan himself a bank would not even consider the loan with half finished duplex. you would need a GC to qualify and he would be paid in stages. Check it out or pass on the deal. Owner finance or lease option works as well but I would be checking on building violations against the property as my first stop. Easy to do and save you lots of grief.

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  • Brian Smith
    Rental Property Investor · Shreveport, LA · Member since 2015 · 36 posts · 18 votes
    10y

    Is $600 the expected market rent on both units? If the answer is yes and the rents can't be raised then the answer is WALK. If you add in 20k in rehab, lawn, snow, any common utilities, and 2 kitchens... seems like a daunting task to make those numbers work. If rents can be raised with a decent rehab then maybe so. Don't try to force these numbers to work if they don't, because another deal will come around and maybe passing on this deal IS the lesson you're needing to learn on this property. Every property is a chance to learn even if it means passing it up.  Just my .02

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  • Chris Jackson
    OP
    Investor · Chambersburg, PA · Member since 2016 · 108 posts · 23 votes
    10y

    @Charlie DiLisio Could you discuss a little bit more about the building violations you were talking about? How or Why could there be some sort of a building violation? And you said it was easy to check on that - how does one go about finding that information?

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  • Chris Jackson
    OP
    Investor · Chambersburg, PA · Member since 2016 · 108 posts · 23 votes
    10y

    @Brian Smith My real estate agent says the rent on the on the occupied side right now is $675 a month.  I am thinking I might get $700 after rehabbing the one side of the building - but that's probably about max. This duplex is in a lower-income section of downtown.  (My agent used the word 'ghetto'.  haha)

    My agent also told me she knew of an off-market SFH for about $45K that needed a lot less renovation than this totally gutted duplex.

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  • Charlie DiLisio
    Investor · Lake Worth, FL · Member since 2014 · 378 posts · 184 votes
    10y

    Building violations get places on properties all the time and sometimes they accrue at 75 to 100 per day.  It goes as a lien on the property and you won't be able to get a clear title to it unless the violations are taken care of.  The building department can pull the property up and give you a list if there are any on the property for free.  At least you would have a heads up on what you are getting into.  Many do not rehab the property because of the hassle of getting permits and expensive repairs.  I do my own work so its easier for me to correct them but the list is a bargaining chip for you as well with the owner.  They may not be lying to you but just omitting the information.  

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  • Chris Jackson
    OP
    Investor · Chambersburg, PA · Member since 2016 · 108 posts · 23 votes
    10y

    @Charlie DiLisio thanks for that information!  I'll see if I can get my real estate agent to check in on that for me. I'm not sure that the deal is going to work. Will keep everyone posted - but as of right now I can't see it working for me unless I get some private, probably.

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