First deal - bigger rehab or more turnkey?

Question

My business partner and I are looking to complete our first deal in Ithaca, NY. We have about $50k in capital to spend and any costs that surpass that we would look for a hard money loan.

The properties that we are seeing fall into two categories generally - fixer uppers that are priced at around 70-100k and more turnkey properties that are priced in the low to mid 200k region.

We want to follow the BRRRR strategy, which would most likely push us to the larger rehab properties, but are not sure if a large rehab is the right move for two beginners in the real estate investment game.

What are your thoughts?

Philip Davidowsky · Answer

Hi Madison,

I may be able to offer some perspective. First, if you are looking to manage this remotely, you may want to start looking now to build a team of people you trust to look after the property. This would include a handyman or various trades people, depending on the age and condition of your property. The good, trustworthy people are often quite busy and expensive. The ones who have availability are very unreliable and their work is poor quality. This may be true anywhere you go, but I have had three different plumbers schedule, reschedule, and bail on me multiple times over the last month. The one's with any reputation are booked through Christmas.

If you want to hire a PM, I would vet them carefully as well. Many property management groups have bigger fish to fry and your small investment will be put on the back burner when it comes time to fill a vacancy or address any maintenance.

On to the properties themselves, you will find the most value in the multi-unit properties. Here, people pay a premium for privacy, so two 1 BR apartments will always rent for much more than a 2BR SFH. Similarly, a duplex with 2BR on each side will always gross more than a large, 4BR 2 bath home. This is true whether you rent it by the unit, or rent it by the room.

Many buildings in Ithaca are quite old, especially in the city. If you are looking at a renovation, you are signing up for some big projects. Many buildings that have been used for student housing are in disrepair due to the never-ending demand. Also, because the student population has always remained consistent, the price for a building is quite high. Have you considered looking at the towns on the outskirts of Ithaca? There seems to be very good value. Rents are decent, but the purchase price is significantly lower. Why pay for a $500k property that cash-flows $200/door when you can pay for a $100k property that cash-flows the same? I get that the debt pay down and appreciation are higher, but if this is the argument, buy five of them.

Again, these are just my perspectives. If you want to chat, feel free to send me a message and we can talk more, or we can chat on the phone.

Cheers, Phil

Colby Fryar · Answer

@Madison Heck-  looks like a great market there with a lot of options.  Good luck to you!

Philip Davidowsky · Answer

@Stephanie Jacobson, you are right. I should have been more specific in that these outer towns will not be satisfying the student market. If that is the market that you want to target, I agree that you would be hard-pressed to find something around the $100k mark that is only a minor/moderate renovation.

I think the idea of a major renovation would be quite brave for someone that is both new and remote. That said, if BRRRR is your goal, consider something like this:

https://ithacamls.rapmls.com/s...

This seller is quite motivated to sell, but the place needs a wicked overhaul.

For something turn-key, my friend and her fiance are selling their duplex and moving to Amsterdam.  She was a grad student, he was a postdoc. It is practically new, and I couldn't believe the price they asked: https://ithacamls.rapmls.com/s...

If I had the capital, I'd buy this in a heartbeat. Brooktondale is close enough to satisfy the older student population, and its village is comfortable and holds some amenities.

Philip Davidowsky · Answer

Oops! Sorry about that.

Full reno: https://www.zillow.com/homedet...

Turn-key: https://www.zillow.com/homedet...

Stephanie Jacobson · Answer

I agree with everything @Philip Davidowsky said, but in order to find a decent rentable place for around $100k you'd land pretty far from downtown. Places like Dryden, Danby and Freeville have soared in price over the past few years! With that number, I'd expect you to find something more in Enfield, Berkshire, Spencer, Newark Valley, Lisle, etc. and then rent rent drops significantly. I'm in Brooktondale, which is probably the very outskirts of folks who still consider themselves part of Ithaca as they head east.

Madison Heck · Answer

@Stephanie Jacobson I'll message you so we can chat more about this!

Stephanie Jacobson · Answer

Hello again Madison! Don't mean to stalk your posts, but figured I'd post a reply.

This is an expensive area, as you know. (Thanks, Cornell!) Anything under $100k that's not manufactured is going to need significant rehab. I had a listing at 2754 West Danby that fell cleanly into this category: $45k, in need of around $100k rehab, ARV $220k. There are a few more like that available now. The ARV is there for a good BRRRR, but the prices can be high for properties that need so much work, and it is a HUGE undertaking for a new investor (or anyone, really!).

I'd say this all depends on your risk tolerance. Of course BRRRRing has higher rewards than buying turnkey rentals, and higher risk too. The good news here is that exit strategies in our market are a-plenty: just cleaning a property out and making it flip-ready will gain you some instant equity.

Of course a turnkey is more reliable, but slower going. What kind of foundation do you want to build? What would happen if you failed at the initial rehab? Do you guys feel comfortable with bailing on a project and re-selling? Would it set your timeline back significantly to purchase a turnkey and build more slowly?

Stephanie Jacobson · Answer

Ah! Yeah, that first one is so cute but it has some serious moisture issues. The second one is by me! I love this area; it's beautiful with fresh air and rolling hills, but so close to downtown and even Vestal for more shopping and restaurants.

Madison Heck · Answer

@Philip Davidowsky The first one you sent is actually one that I have been sizing up extensively, but it looks like an almost entirely new house will need to be built, you're right.

The second is a beautiful home! A bit out of our price range, but looks totally turnkey.

Thanks!

Stephanie Jacobson · Answer

@Philip Davidowsky would you post the relator.com or zillow links? The rap links go to a list that match your criteria rather than a single property.

First deal - bigger rehab or more turnkey?

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