Fixer upper in desirable neighborhood

[Kelly Jones]

Hello!

I'm an avid reader on the forums, but this is my first foray into starting a discussion.

Curious what you all would recommend in this situation:

I am under contract to purchase a SFR located in the South Puget Sound (WA) in a strong, desirable neighborhood for $302k.

4 bed/1 bath, 1600 sq ft, built in the early '20s. The plan is to rent our current home and move into this property as our primary residence.

The house needs a considerable amount of work- including a new bathroom, kitchen, windows, lacking a furnace, plumbing and electrical repairs. My husband and I are able to do quite a bit of the work ourselves; estimated cost of repairs will run $20k-$30k. The home's after-repair value is around $400k. A large majority of it's value is based on its location in this 1-mile radius neighborhood.

In contrast, there are several homes for sale right outside this neighborhood that are comparable in price (~$300k) but are move-in ready. We're struggling deciding whether to proceed with the purchase due to the intense amount of initial time and capital needed upfront.

This would be our largest project to date, and would be a stretch financially. However the estimated payoff appears promising. Thoughts?

Thanks for any feedback!

[Andrew Jones]

I think the biggest red flag I'm seeing here is the budget. $20-30k is not very much money even if you are both licensed contractors (I'm also assuming the work will happen on nights and weekends if you are gainfully employed). Here is the breakdown as I see it :

HVAC: $2500 plus permits and inspections if fiddling with a gas line.

Kitchen: new appliances? Counter tops? Paint cabinets? Floors? Lighting? A lipstick job would easily run $5-10k. Major renovations could triple that.

New bathroom: $15k in materials, permits, etc. Retail would be $20-40k depending on fit and finish.

Electrical:$1-5k (knob tube? Old panel? Bank on full replacement)

Plumbing: who knows. Clay pipes? Galvanized? Roots? Rust? Could be a fortune on a nearly 100 year old home.

Speaking of the age of the home insuring this house will likely be more expensive/difficult than you would guess. Most of your major insurers won't touch a property that needs that much work.

The next concern would be the timeline. If you and your husband are doing this on nights and weekends while working full time and managing a rental property you may find yourselves spread pretty thin. All of this would be fine for a cash flowing asset, but it sounds like you want to live here long term. Will your old home cash flow factoring for higher insurance costs, taxes, maintenance, vacancies, etc? As a business decision I'd be skeptical if you couldn't do better.

Just so I'm not being a complete downer there could be some benefits. The reno on the new place will certainly take long enough to qualify as a long term hold and may do well as a 2/1 duplex if the layout allows. After renting your old home for a year (two years? I forget how long.) you could 1031 to something more profitable. Do a cash out refi on the new house at the same time as that 1031 and you could jump into something significant. Whatever you choose good luck.