Excited one minute. Worried the next. Cold feet?

Question

SF 3/2 1,529 sq ft with a 650 sq ft guest house (1/1 w/ kitchen) on a 9,829 sq ft lot. Walking distance from Old Town Scottsdale. List price - $295 Total 100k gut job for both the main home, guest house, and the yard (100k is on the high side). Comps in the area are Mid to high $300s. We believe we can purchase the property for $270 and are considering making an offer.

We are newbie investors, this would be deal #1. We have been looking for a SF with a guest house for months and this is the first and only that has come our way. The location is perfect, The guest house is a great location for short term vacay in the area. The neighborhood is great for us as a family. The area is expected to appreciate in the next few years. We've run the numbers and we would be cutting it close if we decide to refi in a year/year and a half and use that money for another property. We don't want this property to hurt our ability to scale and continue investing.

As newbies should we stay away from rehabs this size with little room for error?

John Leavelle · Answer

Howdy @Toby Rachel

At first glance this is not a good investment.  I would need a lot more information to really know.  You said "we've run the numbers ".  Show us your analysis so we can help.

If it needs a complete gut job is it currently in livable condition?  How were you planning to finance it?  How did you arrive at $100K estimate?

Who is doing the Rehab work?  You or a General Contractor?

What is the rental market rates for the area (both main and guest houses)?

Have you researched Refinance loan for rates and terms? Estimate of future mortgage payment?

To me in order to meet your projected ARV minimum of $350K the numbers need to be closer to the following:

Your All-in costs (Purchase price, Rehab costs, Holding and Closing costs) need to be $245K (70% of ARV). This gives you a 5% buffer encase the Rehab costs are over budget or the appraisal comes in lower.

That means with a Rehab budget of $100K you are left with $145K for purchase and Holding/Closing costs.

The Refinance loan will only be 75% of the new Appraised Value ($350K) or $262.5K.

This would be a no go for me without any additional supporting data.

Bob Okenwa · Answer

@Toby Rachel

It sounds as if this property wouldn't be a cash-flowing property, but would aid in helping pay a part of the mortgage on the main residence. Not a bad way to go, but it must be understood that this property probably wouldn't cash flow unless you hit the numbers @Cody L. suggested. If this is a property you plan to live in for a while, then it would make sense to have some help paying down the mortgage with the use of the guest house as rental income.

A 100k rehab for a first-timer may be too daunting a task, so make sure all of your numbers are calculated correctly inside and out, front and back.

Toby Rachel · Answer

We are looking for a home to live in that can also provide an income. That's where our confusion is coming in on how to analyze the property. If this was just a rental, we would have two houses on one lot and the property would cash flow. But since it's not a two property rental b/c we will be living in one and renting the other, how should we analyze the property?

Cody L. · Answer

I don't get what you want to buy this for? If you pay $270k and put in $100k you're in it for $370k. Or round down: $350k

Unless you can rent at minimum $3k, it's a bad rental.

And if sales comes are mid high 3's, that's what you'll be at. So after all closing costs you're break even at best?

What is the positives for this deal?