First Rehab - Does this make sense?

Question

Bought an out of state property a year ago, 2400 sqft duplex. Inherited the existing tenants. Here was my proforma assuming everything went to plan (which it didn't!)

One tenant stopped paying in May, the other racked up one maintenance charge after another. Finally got the entire property cleared and there is a good amount of work to be done specifically to one unit that was horribly cared for. Floors, walls destroyed, broken windows, the whole 9. I'm going back and forth on the quote with my contractor but this is where we're at now:

~25k materials/labor for the bad unit, most costs coming from the kitchen. Big-ticket items include:

6k cabinets
2.5k countertops
1.6k flooring
1k appliances (stove & fridge)
1k bedroom flooring
10k labor

~5k materials/labor for the "good" unit, most costs coming from fixing door frames, paint, cleaning.

After the rehab, I should be able to get 1k/door. But dumping this much money into a place I just bought for 105k is giving me reservations. A few questions:

I intend to source materials myself to reduce cost. As a newbie, 6k for rental grade cabinets, 2.5k for countertops sounds very high - does this sound in line with rental quality materials?
Assuming all of the above, is it simple enough to update my existing pro-forma with a rehab budget and new rents to get an idea of my return? i.e:

Does this sound like a worthwhile investment?

To note, I purchased the house 1 year ago for 105k (43sq/ft), it appraised for 115k at purchase, and properties in the area appear to be trending toward 100sq/ft as per my realtor and some comps on MLS.

Thanks in advance for any insight!

Adam McQuiston · Answer

I’m in rochester and it depends on the area and management company. As far as pricing on materials it is high. Countertop creations would be cheaper and do instal including sink instal if you provide it. Also the flooring call United carpet and ask for Jim Reed let him know I sent you. He can set up install also.I have other contacts on cabinets as well. Feel free to get with me

Matthew Irish-Jones · Answer

@Joseph Colliu. Where in Rochester is this? You are paying $25,000 for what I would consider a light to moderate remodel. I don’t even see appliances included or a dishwasher installed for $25,000, or that all windows are being replaced, and your are not even getting a new bathroom. I’m in Buffalo 1 hour away. We do similar remodels. Each job is different so I can’t say by line items if you are getting a good deal or not but, just to speak in generalities, we can gut and rebuild a unit that size (in most cases) for $25,000. And that includes bathrooms, kitchens, windows and appliances. You are not even getting a new bathroom, you are getting a caulked bathroom. Contractors to do this kind of work can be hard to find as well though, so do your homework.It sounds like rough clientele, which means it could be a rough neighborhood.

Timothy Smith · Answer

Agreed with @Matthew Irish-Jones on all points above. I almost froze at your cabinet and countertop budget. That’s way overpriced for the property you are describing -- either you are getting ripped off or seriously overspending. Given your rent numbers and ARV, you should be doing the kitchen cabinets and countertop for well under $3K. If you are only supplying a stove and fridge, rather than a full 4-piece kitchen, my assumption is that this is a C or B class neighborhood, so there is no need for solid surface countertops or anything above builder grade cabinets. This is not to diss the tenant base at all! But simply put, you need to build to the market rather than overspend on something that isn't going to A) increase your return via rent, or B) increase your ARV significantly.My advice is to research local chains (we have Barton's Bargain Outlet here in Buffalo) and find materials comparable with the Home Depot "Hampton Bay" line. Honestly, the prefab countertops at the back of Home Depot are probably the way to go for this place. Again, I'm not saying to "cheap out" but these are places you are overspending and won't see a return. Often times new, clean, and bright looks $$$ but it's not.

Kristian Conway · Answer

@Joseph Colliu I've experienced a similar issue with a duplex as well! My immediate thought goes to how much will your property be worth after you perform this rehab? Based on your purchase price and rehab estimate you will be all in at $135,000. With an LTV of 75% if it appraises for $180,000 you would be able to break even on your rehab. Of course, you would need it to appraise for more to cover your closing and holding costs but based on your number for price/sq.ft it sounds like your ARV will be more than $180k. It's essentially using the BRRRR but slightly delayed. What I love about this use is you now have a better quality asset which results in less maintenance and higher quality tenants. BUT the money that you used to acquire this better asset (aka your rehab cash) is now redeployed into the next investment. So conceptually, I think it definitely makes sense to complete the rehab. In practice, I would definitely reach out for additional quotes just to price check the contractor. This also gives you the opportunity to talk to more contractors, establish contacts, and learn the lingo. Working in construction myself, if they sense you don't know something 8/10 times they'll try and take advantage of that unfortunately.

Joseph Colliu · Answer

@Matthew Irish-Jones this is a block west of Culver just south of Homestead Heights. I'd say it's a solid C neighborhood, with potential for appreciation based on the spill-over from east of Culver. The inherited tenants were definitely giving the block a bad name, I had neighbors reach out directly to me about them being a nuisance. Hopefully, this flip and solid tenants will be a positive direction for the block overall. @Timothy Smith thanks for your insight - I still have to see the final itemized bid, but have read from a few sources $3k is avg cabinet cost so that's one area I may look to Home Depot to cut back on, along with countertops. We're essentially changing the entire layout of the kitchen to make it more functional so not sure how much that weighs into the price of material. I'm going to head to my local Home Depot today to take a look at some materials.

Matthew Irish-Jones · Answer

@Joseph Colliu whoops sorry, I see now stove and fridge included. Still feels high.

Joseph Colliu · Answer

Thanks for the reply!I need to taper the 100sq/ft expectations, while the zipcode averages that, most are smaller SFHs. I see the $/sqft diminishing past 1200sq/ft, and my unit likely won't hit $100 for some years. It's tough to assume, but I'm hoping ARV may be $150k by summertime (seller's season). I could still recoup some cost to roll into the next deal but not expecting all.But - if I can be invested ~60k cash (down payment, closing, and rehab cost) and rent for $2400/mo, 14%+ CoC after expenses sounds good, no?

Joseph Colliu · Answer

@Daniel S. typically in Rochester landlords pay water on MFHs. After some research and speaking with my PM and realtor, (cautiously) amending my after rehab rent assumptions to $1200/door, which makes this more attractive, even if I crack the 30k mark on rehab cost. Thoughts?

Danny S. · Answer

@Joseph Colliu Do the units have their own water meter to pass the $50 cost to the tenants?

Joseph Colliu · Answer

The unit is pretty beat, and there's alot of additional small things that add up to the 25. My hope is I can take off up to 25% on some of the material cost by shopping around a bit, but not sure how realistic that is. Here's a more detailed quoteMisc:*Cleanout Apartment*Pressure wash Porch and front of house*Fix broken stairwell window*Replace all door hardware and stops*Repair Back door*Repair/Paint Back Porch*Replace 2 window screens*Install towel bars and Toilet Holders*Repair Storm door*Repair Stairwell door latch*Clean Apartment after all work is completedPainting:*Repair all drywall patches and caulk all necessary seams*Paint all walls and Trim in apartment*Paint Basement Stairs*Paint/Seal Basement FloorElectrical:*Replace all Outlets and Switches*Replace Hallway Light Fixture*Add 1 Light Fixture to BedroomBathroom:*Caulk Tub and SurroundKitchen:*Replace Kitchen Cabinets with Wolf Brand Builders Grade Shaker*Replace Kitchen Floor with Coretex Clickboard Flooring*Replace countertops with 3/4" stock laminated countertops (Renter'sGrade)*Replace Stove and Refrigerator*Replace Kitchen plumbing and Install new drop in sink*Repair all Necessary Trim*Replace 1st Bedroom Floor to Eliminate Warping issuesLabor Hours 10,000.00TMaterials purchased specific to job 13,680.00TDumpster/ Disposal Service 500.00T