Need help with possible first rental property.

[Mason English]

Family member is wanting to sell her house next month in Nederland, TX. (Small town) She knows I want to get my first rental property this year, so she is giving me first option to purchase. 

Built- 1950's...3 bed/1 1/2 bath/ 2 car garage...1432 sqft

Realtor.com Estimate $130,000 (But that doesn't factor the rehab needed)

She kept the house in decent shape, but I also haven't seen the house in a few years. From what I remember, it could use some updating in the more important areas considering its like 60 yrs old. 

Rehab Needed:

Both Bathrooms should be updated. Completely I think

Maybe kitchen? (Counter tops most likely) I think the rest was fine. 

Possible foundation issue (Which I know can be expensive) Uncle said he saw some cracks in the walls he was concerned about. Won't know more information until we get inspector out there..

A house a few blocks down is also a 3/1.5/2 and is asking $1,350 for rent. Based on the pics it could also use a bathroom remodel and some cosmetic stuff. 

ARV would be around $130-135K range i believe..

$$- I have a good amount of savings ready to go, and I also have a LOC of $15K i can use.

Based on the information..

What do you think would be the best route for financing this deal? 

and..

What would you most likely pay for the property to make this a good deal for you?

I appreciate any advice given. 

[Ryan Detig]

@Mason English  Glad to see you are thinking of taking the plunge.  I am not sure of your families financial situation but this looks like a win win win situation for owner finance.  Based on some work I have done here in Port Neches and Port Arthor I would guess that 2 bathrooms and kitchen would run you 15-25K depending.  If the foundation just needs leveled I would say 10-15K based on quotes I have seen for similar size houses.  Obviously I have not been inside the house to see though.  

I would negotiate buying the property as if you were going to flip it.  Get ARVs from realtors in the area.  I recommend Aislinn Phelan with Keller Williams in Beaumont.  I can set up a time to walk the property with my GC if you want and help come up with a good scope of work and rough rough costs.  I would also get the foundation looked at (National foundation or ACE house leveling) and a quote for leveling.  

I would take all of that info to your family member and show her the numbers and give her the best offer you can.  You can then say something like "If you were interested in owner finance, you would actually get this much over the next X number of years" as a lead into owner financing.  Make sure you know how owner finance works so you can be educated when describing it.

Based on what you have told me if I were to buy the house I would want to be getting it at around 60-70k.  The nice thing is that all of the repair costs you get to help make your case for your purchase price don't actually have to be spent right away.  Unless stuff does not work in the house, I would rent it as is for 1050-1200 (below market) and in X number of years you spend the money on the rehab and flip it.   Or if you keep it long enough and it is paid off and you want to get rid of it you sell it to another investor and never actually spend the money to flip it. 

This is just one strategy.  Call me if you want to chat about others.  Also I am willing to help you get a scope of work and costs if you need it.

[Mason English]

Ryan Detig Thanks for the info. That's a good idea about just renting it "as is" for now then eventually do the rehab if I wish. The only issue with owner financing is the home is my grandmas. She is 85 yrs old, and I'm sure she would most likely want all the money she can get for it at once, rather than monthly payments. I plan to come down and meet with her soon to discuss everything and see what she wants to do. Also, thanks for the recommendations, and I think it would be good to get you/your GC in to take a look for me. Thank you!

[Ryan Detig]

@Mason English  No problem.  Just let me know. 

[Dalton Osmanski]

Make sure in your purchase contract to add subject to inspection because foundation costs can kill a deal an cost you an arm and a leg. In addition do your homework on the property's ARV potential no point in putting money in a property if the comps support the improvements.

[Ben Wilkins]

@Mason English - could you get some comp values of houses in the neighborhood? The online estimates are notorious for being incorrect sometimes ;). To consider a SFH for general investing, you will need the comp rates, repair cost, and ARV. With those, you can determine if it is worth purchasing. Be careful of letting relationships determine the cost - it's still a business venture for you, and it wouldn't be a good first step if you over-paid due to family.

Get a detailed inspection done, as well as a walk through with someone who can give you estimates on repair work.

You did a great job of determining rents for a similar property!

What are your expenses for the property if you were to buy it? I will assume tenant-paid utilities, so what are the taxes? Have you run cash flow numbers yet to evaluate it as a rental?

With those details, it'll be easier to answer your second question

Back to your first question about financing:

The less equity that you have tied up in the investment, the more cash you have available to work for you and earn more income. I would end with a 20% down payment financed through a conventional loan since this is your first property. You could pay cash up front to get a discount and faster closing, then do a delayed financing.

[Brent Coombs]

@Mason English, being in a "small town", I recommend you do a lot of research about who RENTS there, happily paying $1,350/m? (Note that $1,350 is an ASKING Rent - not ACTUAL!) Especially because, they could BUY any similar property there with just 3.5% deposit, and their PITI payments would be less than $900/m.

Will you cope financially with any extended VACANCY? In summary, I agree with those who suggest leave it alone UNLESS you can get it at the normal wholesaler/investor discount, as if from a motivated/desperate Seller. All the best...