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Updated about 6 years ago on . Most recent reply

User Stats

64
Posts
10
Votes
Zachary Sexton
  • Sandy, UT
10
Votes |
64
Posts

Live In Flip Deal! Or flop?

Zachary Sexton
  • Sandy, UT
Posted

My wife and I are under contract on a duplex in the rapidly developing* east side of Austin, TX.

We made a $471,000 offer and are approved for a 3.5% FHA loan (as long as the sellers are willing to replace the roof, add some base board heaters and fix some plumbing issues... fingers crossed).

Our taxes, insurance, annual and upfront MIP have us in there at about $3,330 a month with a $25,000 downpayment.

The current rent for the front and back units are $1,450 and $1,535 respectively. Rent-o-meter says the average rent is $1,765 for the area, so there may be some room for raising the rent (especially after the first round of updates we plan on making). AirBNB-ing our place when big events come into town could further subsidize our holding cost (#gettingpaidtocamp!).    

The plan is to move into the back unit. Renovate for a year. Move into the front unit. Renovate for a year. We'd like to do the renovations ourselves so we can: 

  • learn how the guts of a house work to become better investors
  • capture more of the equity with our sweat
  • pay for the project as we go
  • save money on material costs w/ CraigsList and Restore purchases
  • become more flexible, capable humans

We also think it would be fun.

After 2 years, we will try to sell each unit individually as a condo. The units are already metered separately so this should only run us an extra $3,000 to $4,000 in legal/survey fees + a fence.  

We technically have the lot space to increase the size of the structure and turn these small 2/1 houses into 3/2s. Comps show that could give us a very high after repair value: 

$900,000 ARV - https://matrix.abor.com/Matrix/Public/Portal.aspx?...

We could also keep the units as 2/1s. Do a full interior exterior remodel. Landscape. And possibly add a nice screened in porch to make the back unit feel bigger.

$700,000 ARV - https://matrix.abor.com/Matrix/Public/Portal.aspx?...

I can't imaging the reno costs on the less ambitious 2/1 route going over $100,000 with us doing a majority of the work. That would leave us with a potential six figure profit as long as the market doesn't turn on us (and, personally, I'm fairly bullish on Austin even if the rest of the economy and/or housing market takes a dip). If the market does go down, we can hold the duplex as a primary residence or full (breakeven) rental while we wait for the market to bounce back.   

What do you think BP? Are we setting ourselves up for pain? Or could this be a good real estate learning experience for me and my wife? Honestly, as long as we don't loose our shirts I'll consider it a win. 

Thank you for your wisdom.

Sincerely,

Zack

P.S. Feel free to ask me about any more details that would help you evaluate our situation.  

* This is how hot the market has been:

Most Popular Reply

User Stats

384
Posts
318
Votes
Russell Gronsky
  • Specialist
  • Baltimore, MD
318
Votes |
384
Posts
Russell Gronsky
  • Specialist
  • Baltimore, MD
Replied

@Zachary Sexton, it is clear from your post that you've never flipped before. Have you ever worked in he construction industry at all? You have some very lofty goals for this duplex and you might be moving too fast here.

First, does the rent-o-meter numbers match what you are seeing advertised on craig's list for comparable units for rent? 

Second, if you plan to sell the duplex as individual condos, you'll probably have to split the parcel of land. Better call your zoning department and building department to verify this can actually be done and what it will take to accomplish it.

Third, you'll have to look long and hard to see what exactly you need to do to those 2/1's to get an ARV of $700,000. If the building is only selling for mid $400's, you'll have to do some major renovations to get that $700k ARV. This isn't going to be just a paint/carpet/new light fixtures type of renovation. You're probably talking about removing walls, probably adding a 2nd bathroom, maybe digging out and finishing a basement? I don't know the Houston market but from my experience being a flipper, I haven't been able to get an ARV that high without tearing apart the house to the studs and floor joists. This kind of remodel is going to need more than just your sweat equity to finish. This kind of renovation will need A LOT of skilled and licensed professionals. Plus, living in a house that is being renovated is an experience I simply cannot describe to you. When I was single, I used to do it and I learned A TON but my dad was a GC for 40 years so I grew up around construction and knew what I was getting into. You might have the best intentions but be prepared to move into an extended stay motel for a month or two, in case you and your wife realize it is too much to handle. If you have kids, I strongly caution you to NOT live in the property while you are renovating it.

Next, if you are going to expand the units to 3/2, you'll need to again, talk to the city to see if they will allow you to do it and find out what you need to do to accomplish that. If you are allowed to do it, you'll probably need to add foundation to your existing house and build from the ground up. This will be even more licensed professionals you will need to hire. 

Any way you look at it, you are about to set yourself up for A LOT of pain. I didn't even touch on how much energy you will spend on finding good contractors and dealing with them. This pain will be well worth it in the long run but you are in for A LOT of it. I'd also strongly caution you about doing additions for your first time out unless you have a trusted friend with lots of rehab experience you can call up any time you have issues come up.

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