Valuing a Giant Kitty Litter Box

[Jeff Lever]

My wife and I have an offer in on a duplex and with the way the market has been lately, it's another instance of multiple offers. The sellers are soon to ask for everyone's 'highest and best'...which is really what I was hoping to avoid given the real estate market here in NC has been on an absolute tear since '15. Not to get too political, but the new administration's promises of higher taxes isn't something that doesn't give me the warm fuzzies about the stock or housing markets. 

So we found a damaged duplex in a marvelous location, but the thing could be declared a biohazard. The house had the carpets all ripped out because of the cat piss and poop...and it's still completely all over the place. The smell is so bad it gags you. The lady must have had a hundred cats. Underneath the carpet was those thin width hardwood floors. Be nice to salvage them if possible...but I don't know enough about floors to know if 1) They're salvageable at all 2) If I will have to tear any decent flooring out to get to the subfloor to replace it. The unit totals about 1400 sqft w/ about 200 sqft being the kitchen area that has linoleum flooring. 

Part of the duplex is presently rented with an older couple that has been there 5 years paying $650/mo. That's about half market rate :(, but I'm not about to push an 80+ year old couple out to a new place. We haven't seen the occupied unit yet, so not sure what damage it has (if any), but the tenants said they took good care of their pets. 

Here's a tentative list of repairs we've estimated. The duplex in total is 2800 sqft (each unit is 1400 sqft)...

• Floors (Soaked in cat pee/poo): Repair (if possible-clean/seal/vinyl planks over top) $7,500, Replace: $15,000
• Roof (decent condition but looked like one soft 4'x4' soft spot): Repair: $750, Replace: $17,500
• Plaster Walls/Ceilings (like absorbed cat pee odor): Repair (multi-coat oil paint kilz): $2,500? Replace w/ Drywall: $8,000
• Windows: $6,000 (optional...they are single paned windows)
• New Half Bath: $10,000 (optional...full ball + $5,000)
• New Appliances: $2,000
• New Front Porch Roof & Railing (optional, has existing patio): $3,000
• New Kitchen (optional...countertops, cabinets, fixtures): $10,000
  

Purchase Price: $180k

• Livable ($1,100/rent) - repair floor w/ vinyl, fix roof, seal walls/ceiling, new appliances, new half bath: $22,750 + 20% overruns: $27,300 
• Nice: ($1,250/rent) "Livable" + new windows, new covered front porch, new full bath): $36,750 + 20% overruns: $44,100
• Excellent: ($1,400/rent) Gut house - new floors, walls, ceiling, appliances, kitchen, front porch, full bath, and new roof: $76,500 + 15% overruns: $88,000

We'll probably target 'Nice' as I think that will give us the highest rent relative to costs. Probably mix in some kitchen upgrades as well but not go all out...which would put us at $50,000 which includes a $10k cushion. My realtor is telling me ARV is likely to be $275k, so not a 'great' flip, but the location is so great we'd probably buy and hold long term, which would be good news for grandpa in unit 2. :)

Would like opinions on my projections...and what method would be the best way to finance all this....

Financing, we have 3 options:

• $150k cash + we could take out a $100k equity line of credit on our primary at prime + 1.5%: ARV refi pulls cash out/pays of LOC on $275k valuation = $206,250 out or $23,750 out of pocket & $1,102/month pymt = ~$900/CF/mo
• 30 year traditional and roll repairs into cost: $80k down $150k financed 30yr @ 3.375% (total out of pocket: $80k + $858/month = ~$1200/CF/mo)
• 30 year traditional: $45k down $135k financed 30yr at 3.375% + $50k in cash for repairs (total out of pocket: $95k + $792/month = ~$1250/CF/mo)

This is only our 2nd rental property, so any advice is greatly appreciated! :) Thanks!