Wausau, WI Duplex; rehab, plus section-8

[Samuel Bavido]

The Basics: 

Upper/Lower duplex in Wausau, Wisconsin. 1910 square feet, lower is 3 bed/1 bath, upper is 2 bed/1 bath. Built in 1900. Lower is currently rented for $550/month, upper is vacant. Neighborhood is borderline (literally); there are nice homes about two blocks in one direction, and a not-so-great part of town two blocks in the other direction. One thing I really like about this property is that it is by far the ugliest property on the block; the houses near it are well-taken care of, and several have been re-habilitated. 

List price: 40,000. 

Needed rehab: 

--new flooring through most of the building. 

--New cabinets in both kitchens.

--Some wall repair in the lower unit. (minor)

--New paint in several rooms.

--Half of the roof is in good condition; the back half has some storm damage and needs some repairs soon; probably need to replace the back half within a year. 

--Paint on the siding is old and peeling; since it's lead-based, it would be best to strip it all off and do vinyl. 

Some Estimates:

--New siding will cost about $4,000 ($12,000 installed). I can do most of this myself, however. 

--Interior rehab will run about $3000 per unit (again, doing most of the work myself). 

--Roof is quite high and steep; I could do some of the tear off, but I want a professional to install it correctly. $15,000 (for the entire roof; not just back half)

--Fixed up, the upper unit could rent for $600/month. 

--Fixed up, the lower unit might be able to bring $650/month. 

--Fixed up, the unit will appraise for 70-75k (this is based off of info from the seller; I need independent verification). 

So, to BURRR this property, I cannot spend more than 56k. I'm estimating 27k in repairs, which means my max offer should be 29k. However, it's an old house, and I feel like there is potential for more issues in the near future; old heaters, water heaters and wiring. Does 20k seems like a reasonable max offer? That gives me some wiggle room. 

Some Complications: 

--I don't have the cash for this project. So I'll need to get creative. If the owner/realtor (same guy) are willing to do a 18-month note with interest-only payments, I could leverage my excellent credit to do the rehab using 0% interest credit cards. That would give me 12-18 months to complete the project and re-fi the property. The other option is to find a private lender who would invest in the project. 

--Winter is coming, and my brother-in-law, who is a locale contractor, does not have time for this work until next spring. My idea is to pay someone to patch the roof where it needs it, forget the siding, and rehab the upper unit as quickly as I can, so I can get a tenant inside. At that point, I'll have a cashflowing property through the winter; all cashflow would be saved towards additional unexpected expenses. Come spring, I re-roof, re-side and rehab the lower unit. Hopefully I could get the re-fi done by early next summer. 

--The lower tenant is on Section-8. I know very little about this; can anyone point me towards resources relating to this? I know that some landlords love it, and others won't touch it; why? 

What other questions would you want to have answered before you made a decision on this property? Given the information I've given you, would you make an offer or back away? What do you think my maximum offer should be? 

[Mark Strobel]

Lots to chew on in your post.  Here are some of my thoughts.

Be careful about assuming that you can do the work yourself.  This much work is going to require building permits, and most of it will require a "Dwelling Contractor License" from the State of Wisconsin.  In addition, the City of Wausau is pretty restrictive on what non-occupant owners are allowed to do, which isn't very much.   If you need to change a faucet, they allow that level of effort, but not much more.  The City inspectors are known for driving around the city looking for dumpsters.  If a dumpster is located where a permit has not been issued, a citation usually follows.

I'm not sure that I would scrape the existing exterior lead-based paint.  That can be extremely expensive, especially since the City will not allow you to do this yourself.  I would just put the new vinyl siding directly over the old siding.  You might want to considering adding a layer of foam insulation before putting on the new siding.

Be careful about the roof tearoff schedule.  The local waste haulers are unbelievably swamped right now. We just finished a roof in late July, and it took them 3-4 weeks to even come pick up the roll-off box. That was Advanced Disposal, and they are not even scheduling orders for roll-off boxes right now.  Also, make sure you know how many layers of shingle and/or cedar shake that is on the house.  Houses from that era with the 12/12 pitched roofs often have the original cedar shake followed by 1-3 layers of shingles.  You wouldn't even think that this is possible, but we did a steep roof that had just that.  Much larger than normal tear-off and disposal effort/cost.  I do have a suggestion for a roofing contractor if you would like it.

If the electrical has not been updated, it is likely that the main service is 100 amp, which equates to a maximum of 60 amps per unit.  This is really a low end setup for electrical these days with the amount of electrical demand of most units/residents.  You might want to get a 200 amp service brought in with two meters, essentially giving each unit 100 amps.  Depending on what needs to be done, that can cost 2,500 to 5,000.  While the upper unit is being rehabbed, you might want to consider rewiring that unit at that time.

The ARV that was given to you ($70-75k) is probably about right for this type of place, but is highly dependent on the rental market. 

If you can get the place for 20k, it is probably worth it; however, I'm not sure that this seller will likely want to drop the price by 50% if you need him to provide the financing, unless the interest rate was 12-15% plus points.

Section 8 is a federal program through HUD that offers "housing vouchers" to low income people. Both the tenant and the house/apartment need to be inspected/certified by HUD. HUD then pays a portion of the rent and the tenant pays a portion. There is all kinds of information on this program both on BP and at www.hud.gov.  In general it is a decent program.  The tenants that we have on Section 8 are pretty decent.  Once a tenant gets a voucher, they can move and the voucher goes with them.  This is great because they are motivated to pay rent due to the risk of losing the voucher if they get evicted, as long as you enforce your payment/late fee policy.

Would love to get together for lunch sometime when you have time.  I work in Stevens Point and live in the Wausau area.