Glen Allen, VA · Member since 2015 · 20 posts · 8 votes
Hey BPers!!
Could use some help analyzing what I hope may be my first deal. I live in Richmond, Virginia and the property is as follows:
SFR
4BR 1BA
1,355 sq ft
On 0.9 acre
B neighborhood with good schools in suburbs of Richmond; property abuts a park
Wholesaler asking $118,000
Needs $20,000 of rehab
ARV $165,000
Expected rent $1,400
Assuming hard money loan $100,000 (wholesaler wants to close asap) and put in $41,000 for money down, closing costs, rehab:
Should cash flow $211 a month (assuming Brandon's standard cost calculator assumptions for vacancy, property management, capex, insurance, repairs, etc)
Cash on cash: 6%
Now...the intangible is, I think the lot can be split and a second property can be put on the land. Or, alternatively, it is enough to accommodate a smaller multifamily property in the future.
I know it's not a homerun, but maybe a single or a double? Certainly has the potential for hidden equity and would rather do a decent deal than continue waiting and waiting for a knockout deal.
Let me know what you think? How would you proceed?
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
8y
When a property is on a busy street the ONLY valid comps are ones on that same busy street. If your ARV is based on comps away from the busy street, its junk. There will be a significant discount for the busy street. To get an idea of how much of a discount, try to find sold properties on the busy street and compare them to solds away from it.
Further, because of the limited comps your appraisal will be even more of a crap shoot than usual. Hard to comp properties mean the appraiser has fewer to choose from. One bad comp can have a big effect.
Don't fall into the "gottadoadealitis" trap. As a new investor, you'll make lots of mistakes that will cost you money. Better to have an especially good deal for the first one to make up for that.
Rental Property Investor · Richmond, VA · Member since 2016 · 22 posts · 31 votes
8y
Randy,
This comment is not in regards to your numbers, but the hidden equity questions at the end. As a planner, I cannot reiterate enough how important and easy it is to call up the local planning office and ask if the property is large enough to be subdivided or if the zoning accommodates small multi-family property. Alternatively if you allergic to speaking with folks or if the person you called is having a bad day, you could look up the the zoning for the property and then pull the zoning code to determine development standards (ie. minimum lot size) and uses allowed by-right. I still always encourage the phone call because you never know what you don't ask.
A couple of things I would want. Verify ARV is based on recently sold comps. I want to see the comps. Get a ruff breakdown of the Rehab estimate. Verify potential rent rate yourself. Do you have finance numbers and requirements from Hard Money lender (Terms). Do you have exit strategy (Refinancing) to get out of the Hard Money loan? If so what are terms?
This is a BRRRR deal so make sure you have your ducks lined up (Refinancing) before purchasing. If you can provide more information then I would tell you whether I would do this or not.
Glen Allen, VA · Member since 2015 · 20 posts · 8 votes
8y
@Kelly Hall- Thanks for the advice! I spoke to my real estate agent after I posted this, and he doesn't think the county will allow me to subdivide. However, he did think it might be re-zoned for commercial in the future. We shall see...
@John
@John Leavelle- Comps in the area are actually closer to $190k or more. This particular property is off of a busy street, so the value is less. Per my agent $160k is a good number. Plus, there is a scarcity of inventory in that county. Rent is verified at ~$1 per sq foot, so $1350-$1400 also is a good number.
Terms of the hard money lender are 12months, no pre-payment penalty, 12.5% with monthly interest-only payments of $1,230. I already have financing pre-approved for more than this amount with a local brick and mortar bank. So, after the rehab, plan is to get the bank appraiser in asap to refinance.
Involved In Real Estate · Greenwood, IN · Member since 2014 · 63 posts · 26 votes
8y
Randy,
Back to the comps... wholesalers tend to give misleading comps and lowball estimates on rehab costs to entice buyers. Make sure a trusted Real estate agent runs comps for you, don’t just take the wholesalers word for it :/ I just looked at a deal where the wholesaler gave comps for 3/2 properties when the subject property was a 2/1 etc.... and he was quoting an ARV within $10k of the 3/2 sold prices :/
Good to hear you are using a Realtor to help. It sounds like you are proceeding with the correct precautions and awareness. Is the Cash Flow after the Refinance or before? This might be a good base hit for you to get your feet wet.
If the lot is larger enough and zoning codes allow the future expansion then it makes this a potential better deal. I purchased a Duplex that was in ruff condition. It needed a lot of Rehab work. It wasn’t a good deal by itself. However, the lot was extremely large and the zoning was for multi family properties. It was large enough I was able to get it permitted for 2 additional structures. A second Duplex and a 4plex. The Duplex should be finished by April. We may start the 4plex next fall (TBD). So your idea is a good one if zoning approved.
As a rental it is not a very good deal assuming the ARV is correct. Rent is a little on the low side in relation to value. Expansion may never happen making this a non starter in my opinion. In this case if the property can not stand on it's own merits as is it isn't worth buying.
Because it is a SFH it is probably not worth the risk.
Glen Allen, VA · Member since 2015 · 20 posts · 8 votes
8y
@Josh Sohar- really? An unscrupulous person inflating values? For their own benefit?? Whaaaa?? Seriously, though...I hear ya. Thank goodness I have a solid agent that knows his stuff and was able to verify. Worth his weight in gold!
@John
@John Thedford- It is a busy road, but the house has such a big lot, that it is offset from the main thoroughfare. When you're inside the house you can't even hear the road. I am told it would create a hurdle to selling it, but shouldn't affect getting a renter.
@John
@John Leavelle- cash flow is based on P&I of refinanced mortgage, and is even more as long as I am managing it myself. Great job on your project! Getting creative and finding that hidden value!
Don't talk yourself into it. Look at the negatives. If location is a barrier to resale, I would bet location would be a barrier to finding and keeping tenants. Just my opinion though!
Rental Property Investor · Gulf Breeze, FL · Member since 2014 · 1k+ posts · 733 votes
8y
enjoy the baseball reference @Randy Frederick I have this same scenario, still pondering. Have you calculated the CoCR if you build vs if you sell the separate parcel and take those proceeds to purchase another cash flowing property ? I’m curious which CoCR is higher for you.
Multifamily Syndicator · Houston, TX · Member since 2016 · 1k+ posts · 2k+ votes
8y
@Randy Frederick Hey Randy, wholesalers are seldom correct with their comps.
As for this deal, I really think it's a super tight deal for the reasons stated below:
ARV may not be accurate
From my experience, when I see 20k rehab [no range, just spot on 20k?!] in an email from a wholesaler, this info has never been accurate when I see the property
(Remember repair estimates are relative and everyone has different finishes). Oh also, when I don't get a repair estimate range [20k-40k] that's already a red flag, for me.
The $100k from your lender will result in at least 10% + points, so ≥ $111k to pay back.
The current RTV = 0.08 (there is some debate on the 1% RTV rule)
Multifamily | New Build + Zoning requirements for the first deal is probably too risky and hard to mitigate
Wholesalers typically say "quick close" for obvious reasons 🤑
I can empathise with you, but I'd suggest you think this one through well.
Hope that helps, Randy. Goodluck. Thanks! - Ola
NB: I have no qualms with wholesalers lol (just for the record).
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
8y
When a property is on a busy street the ONLY valid comps are ones on that same busy street. If your ARV is based on comps away from the busy street, its junk. There will be a significant discount for the busy street. To get an idea of how much of a discount, try to find sold properties on the busy street and compare them to solds away from it.
Further, because of the limited comps your appraisal will be even more of a crap shoot than usual. Hard to comp properties mean the appraiser has fewer to choose from. One bad comp can have a big effect.
Don't fall into the "gottadoadealitis" trap. As a new investor, you'll make lots of mistakes that will cost you money. Better to have an especially good deal for the first one to make up for that.
Good to hear you are using a Realtor to help. It sounds like you are proceeding with the correct precautions and awareness. Is the Cash Flow after the Refinance or before? This might be a good base hit for you to get your feet wet.
If the lot is larger enough and zoning codes allow the future expansion then it makes this a potential better deal. I purchased a Duplex that was in ruff condition. It needed a lot of Rehab work. It wasn’t a good deal by itself. However, the lot was extremely large and the zoning was for multi family properties. It was large enough I was able to get it permitted for 2 additional structures. A second Duplex and a 4plex. The Duplex should be finished by April. We may start the 4plex next fall (TBD). So your idea is a good one if zoning approved.
Did you built a new unit? Or you put a trailer or mobile home in the property? Is it hard to have water, electricity and septic installed to the new unit? Are they expensive?
No, we are not putting in a trailer or mobile home.
It is not hard to add water/sewage and electricity to the new units. The planning and permitting is all handled by the General Contractor.
Yes, it is expensive. Plumbing and Electrical is always expensive. But that is included in the construction costs.
Why would you want to built a new unit next to an old house? Why don't just buy a land and build a new duplex? Does it save you a lot of money? How much does it cost per sqft to build a new house in your area? Are you plan to use a builder or hire a General Contractor?
Glen Allen, VA · Member since 2015 · 20 posts · 8 votes
8y
Thanks everyone for all the feedback and food for thought!
@Ola Dantis- I appreciate your skepticism. The wholesaler I'm working with was referred to me by my real estate agent, and seems above board. There are certainly costs that I didn't count on from the hard money lender (back end points), and carrying costs that I hadn't consider (bank wants six months of rental income before doing cash-out refi).
@Patrick
@Patrick Collins- new roof, hvac unit (vents and ductwork already there), refinish floors, carpet, paint, tile bathroom.
@Jon Holdman- to be clear, the house is not ON the busy street. Rather it is offset on the generous lot. So, it is a bit busy to get in/out, but once you drive through the entrance you don't really feel like you're on a busy street.
Update: So, perhaps I did have a case of 'gottadoadealitis', but I pulled the trigger. I still think it is solid and going to cashflow and work out in the long run. I think it will cost me a bit more money up front than I anticipated, but I'm all about the long game. Plus, an added chunk of cash will flow each month that I calculated for property management (until that day I let someone else manage). We shall see!