Los Angeles, CA · Member since 2017 · 22 posts · 9 votes
I am considering a 4 plex house hack in Los Angeles where appreciation has been fairly high (though subject to change), and I'm considering living in one of the units and renting out the others. However, this property needs a MAJOR 150K rehab before it can be rented. The upside is that it's probably the worst property on an otherwise nice street with good rental demand. It's going to be a lot of work (and also my first real estate deal) so I'm wondering if I'm getting in over my head?
Los Angeles, CA · Member since 2018 · 326 posts · 279 votes
7y
@Josh W. if you are able to get $6,300 in rent and with the 50% rule I think the deal makes sense as long as the property is in a good location for appreciation. It sounds like the rental demand will be good.
Just a couple of things from the analysis; your closing costs will be closer to at least $12,000, do you already have a 4.5% interest loan and do you have a 30 year loan? If you do not have the 4.5% and 30 year loan secured your numbers will change a little.
Based on the limited information I think you purchase the property, get the rehab done asap, get renters in, hold the property for 6-8 years and then sell prior to the Olympics coming in 2028.
Developer · Member since 2018 · 9 posts · 16 votes
7y
@Josh Wade I hear the fear and I get it. For your first project, I’d strongly consider weighing out the pros and cons, side by side to the other non-rehab project you mentioned.
I rehabbing my first 4plex and it’s been the school of hard knocks....costly and very time consuming.
My first purchase for a rehab was a single family unit some years ago. Like you, I was in transition with a day job trying to find the 25th hour in a day to get into real waste investing. I got the first property really cheap so I own it outright with no debt. I knew absolutely nothing about flipping or being a profitable landlord. Financial woes came and the project came to a screeching halt.
I had to quickly move on to a couple of different “carpet & paint” projects for cash flow which seems to be a primary concern given your career.
After weighing the pros and cons, if you decide to go this route, know that time and experiential knowledge to GC this project is critical in controlling costs. If you can’t purchase materials and be on site to ensure labor is performing to the dollar, things can get out of control. Problems on a rehab project most definitely will occur. Problem solving with inexperience can swallow you deeper into costs above the contractors’ original quote. Be sure to get at least 3 quotes for each project and references. Take time to go see their work and also get a sense for their projected workload during the time the contractors will start working for you. Some may try to get you pregnant by starting but leave you hanging because they’re overcommitted to too many other projects.
Without the experiential knowledge of the trappings you may want to have someone else that you trust as your General Contractor so that you can shadow and learn the business.
Real Estate Broker · Bend, OR · Member since 2017 · 46 posts · 20 votes
7y
Josh, stokes that you are finding and analyzing deals; good going. My experience has shown me this stuff is challenging emotionally and financially adding a layer of stress to my life for weeks or months. Strong analytical data and financially staked partners have relieved the stress, for me. Others say the fear, even if just ‘butterflies’, doesn’t go away after doing many and may increase as deals get bigger. I’d like to see better numbers but for a hot market that you can house hack into, it may be your piece to capitalize on. Wish you the best!
It depends on many variables. Are you buying cash? How long will it take you to complete the rehab? when are you going to start earning? true it looks like you are going to have a negative cash flow for along time, even if you rent it? Most of all it depends on your needs. If you are not in a hurry or you have cash to spend without realizing returns then go for it.
Investor · Chicago, IL · Member since 2009 · 1k+ posts · 1k+ votes
7y
You said property is on a good block and in a good area. In the long run, this property should do well for Los Angeles. The pricing in Los Angeles is high because there is a shortage of housing stock. This isn't going to change unless there is a massive building boom with density housing.
You'll suffer a bit from the rehab if this is your first building. But it is a great experience if everything goes well.
Arlington, VA · Member since 2015 · 60 posts · 100 votes
7y
Unless I'm missing it here, you didn't account for PMI...? Your pro forma shows that you're putting down only 10% - that'll tack on another few hundred to your costs per month.
Also, in no world is a 900k property going to have only 2.5k in closing costs.
Rental Property Investor · Bandera, TX · Member since 2017 · 148 posts · 56 votes
7y
@Josh Wade the numbers look great! Since you’re going to be living in it you can also apply for the 203K loan which rolls your rehab costs into the payment. Just search 203K on here.
@Josh Wade I hear the fear and I get it. For your first project, I’d strongly consider weighing out the pros and cons, side by side to the other non-rehab project you mentioned.
I rehabbing my first 4plex and it’s been the school of hard knocks....costly and very time consuming.
My first purchase for a rehab was a single family unit some years ago. Like you, I was in transition with a day job trying to find the 25th hour in a day to get into real waste investing. I got the first property really cheap so I own it outright with no debt. I knew absolutely nothing about flipping or being a profitable landlord. Financial woes came and the project came to a screeching halt.
I had to quickly move on to a couple of different “carpet & paint” projects for cash flow which seems to be a primary concern given your career.
After weighing the pros and cons, if you decide to go this route, know that time and experiential knowledge to GC this project is critical in controlling costs. If you can’t purchase materials and be on site to ensure labor is performing to the dollar, things can get out of control. Problems on a rehab project most definitely will occur. Problem solving with inexperience can swallow you deeper into costs above the contractors’ original quote. Be sure to get at least 3 quotes for each project and references. Take time to go see their work and also get a sense for their projected workload during the time the contractors will start working for you. Some may try to get you pregnant by starting but leave you hanging because they’re overcommitted to too many other projects.
Without the experiential knowledge of the trappings you may want to have someone else that you trust as your General Contractor so that you can shadow and learn the business.
I agree with what Bomani said.
The $150,000 rehab is not for a newbie. If I were you, I will partner this with another investor who has experience in managing a rehab.
Also, ask yourself: "Can I afford it if the rehab budget goes over by 20%?"
Even experienced investors like me - who has acquired over 1,000 apartment units - still have budget overruns. No amount of experience will prevent that.
If you're not prepared for a $30,000 rehab over budget, either don't do the deal or do the deal with someone who can manage the rehab, bring in some skin in the game and will get a portion of the cashflow and the profit when you exit/sell the property.
Specialist · Grand Rapids, MI · Member since 2016 · 1k+ posts · 611 votes
7y
@Josh Wade
Don't use estimates or expenses use actuals. What are the comps in the area for ARV? Just to double check are these numbers reflecting you not paying rent or paying rent to the business that holds the property?
Real Estate Agent · Jackson, MS · Member since 2014 · 33 posts · 10 votes
7y
@Josh Wade
Sorry to be a Debbie Downer, but if I had 2 more hands I would give this deal 4 thumbs down. Forget about all the "scope of work" mumbo jumbo! The numbers are non starters. Live where you want to live and invest where the numbers make sense.
Los Angeles, CA · Member since 2018 · 95 posts · 46 votes
7y
@Josh Wade
Are the units leased? Because if they are you should count 20k per unit to buy them out + lawyer fee, and there is no garantie they will move anywhere. I wouldn’t buy it unless I have all the tenants signatures
Contractor · IL · Member since 2018 · 20 posts · 46 votes
7y
@Josh Wade it seems to me that you do not have enough information to make an informed decision. Your numbers seem too best case scenario. Your rehab costs are based on 1 estimate. It doesn't seem like you've had inspections to get a full picture.
Cosmetics in a rehab is the cheapest and easiest part. The m.e.p's, structural integrity, windows/ doors /roof are what can make or break you.
Work with a gc or a pm to help build a realistic scope and schedule. How long can you afford to pay the bill while it is being rehabbed? 1, 2, 3, ...6 months? Then the time to actually get tenants.
Don't skimp on quality. If you want top dollar: your tenants will expect your space to reflect it. Also keep it neutral. No quirky colors or finishes.
Get real numbers, and time lines and add a 15% -20% buffer. Be overly cautious. Because life happens.
Good luck to you.
Los Angeles, CA · Member since 2017 · 22 posts · 9 votes
7y
All of your opinions are welcome and helpful. I have already started doing a deeper dive into specific numbers. As expected, I think the 150K quote could be very optimistic. Definitely keeping conservative on this one, so thanks for all the input and dose of reality :)
Rental Property Investor · San Diego, CA · Member since 2017 · 439 posts · 578 votes
7y
I am steering clear of LA. Market is good and has been good for a while. People are very optimistic about that part of the city turning around and while it is at the moment (I am in that part of LA multiple times per week and see it first hand) there are too many variables for me personally. Everyone is banking on the stadium but that doesn't always equal a better neighborhood, higher rent, etc... Take a drive down western or Figueroa(right next to Inglewood) when it's dark and see if you want to own property near there because once that stuff is built in Inglewood its all going to bleed over. Numbers might work but if the upside isn't huge...pass