San Fernando Valley opportunity

[Trevor Baker]

I'm a newbie at this, so looking for some advice.  I'm in the Southern California area.  

I have a customer/ friend who is a real estate broker and is aware I've been looking for real estate investment opportunities.  He told me of a house available in the Winnetka area of the San Fernando Valley near Los Angeles.  He is a friend of a friend of the owners.  The house is not yet on the market.

The house is owned by an elderly couple who are both now in assisted living.  Apparently the family just want to sell the house to pay for the couples living expenses.  So, this "deal" has been offered to me.

The house is pretty solid, but needs some updating.  The "Zestimate" is $522,500 (yes I know this is just an estimate).  It needs about $25K in mostly cosmetic renovations.  Going rent would be around $2600/month.  I can get the house for $450,000.  

With 20% down, and most of the variable unknowns, it looks like a negative cash flow situation.  I know in the long run, it should appreciate and I'd be okay.  I'm just worried about something major going wrong and eating up any income I get.  

So, besides getting feedback on the buy & hold option above, what about just doing a quick buy and sell?  If the "Zestimate" is in the ballpark, and I can get it for $450,000.  Does it seem reasonable that I could sell it fairly quickly for $510,000 and make some $ there?  If that's my intention, do I still need to go through the whole titling process?  Would it be better to do the basic renovations or let the next owner do it?

This was my first time using the BP Rental calculator, so I may be off on some of my estimated entries, but here it is...

Thanks in advance for any input.

[David Faulkner]

You would need to run the numbers like a SoCal flipper in this case ... IF your $522k Zestimate is correct AND your $25k repair estimate is correct (both seem very suspect and I would do more due dilligence to confirm, but let's say they are correct), then why on Earth would a flipper buy it quickly for $510k, put $25k in for a total of $535k on a house worth $522k?!? And that does not even count transaction costs to buy then sell and likely does not include holding costs, HML cost of money, etc. Most flippers I know want 10% CoC (not annualized) after accounting for ALL expenses, so from there you can reverse engineer the numbers. I would say at most if your estimates are correct you would need to buy this property for ~$390k to be able to wholesale it to another flipper/investor and make any money. Or if you find a flipper you can trust and are more interested in learning on this first deal than making money (which is also a decent strategy), then bring them in to look at the property under the condition that if they buy it you get to "ride shotgun" on the deal all the way through to learn, and they may or may not toss you a small "bird dog" fee for turning them onto the deal.

One other option, if you can get it for that (or a bit more, say around $400k) and finance it under a traditional loan, could you comfortably afford the mortgage payments? Could be a decent opportunity to house hack, hands-on renovate to get some experience and build sweat equity, rent some rooms out to offset the mortgage, etc. After living there as your primary for 2+ years you could sell tax free or keep as your primary residence, or keep as a rental.

In any case, before you get into the deal or make an offer, you need to firm up those numbers. Ask your broker friend for a CMA. Walk a GC through the property to get a real bid/estimate on the work to be done.