Buy & Hold for Equity Leveraging

[Derik Godeaux]

Investment Info:

Single-family residence buy & hold investment.

Purchase price: $300,000
Cash invested: $115,000
Sale price: $695,000

Property was originally a 3 bed/2 bath home built in 1960. In the early 80s, a large kitchen+breakfast dining was added on, as well as a large sunroom (30'x40'), mother-in-law kitchen, 3 bed/1 bath, and a large downstairs living area. This addition increased the square footage from 1600 to 4300.

Most of the 1980s additions were reconfigured and repurposed to make the home feel like one structure and add features commonly found in a home of this size and price.

What made you interested in investing in this type of deal?

I was looking to upgrade my personal residence to around 2000 square feet. The size of this home was overwhelming, but I was able to negotiate it to the price range we were looking for a 2000 sq ft property (after repairs). My main goal was a value-add focused on positioning to (1) hold long term and (2) leverage the equity for additional buy and holds.

How did you find this deal and how did you negotiate it?

Found on Zillow, went through my realtor. Home was originally priced at $450,000 but I was able to find substantial required work during the due diligence period, which included an estimate of $30,000 of foundation work, $20,000 of miscellaneous structural repairs, and substantial updating (hadn't been updated since late 80s.

How did you finance this deal?

Conventional mortgage for $300,000 and cash for the $115,000 in repairs.

How did you add value to the deal?

Massive kitchen update, substantial reconfiguration of around 60% of the layout, and value-focused updates (master suite, kitchen, etc.). If every room was left as a bedroom, there would've been 7 total bedrooms. To avoid this, one large bedroom was repurposed as a theater room and another was outfitted as a workout room.

What was the outcome?

From late summer 2020 until February 2021, the area experienced a lot of issues: COVID, two major hurricanes, major ice storm (we aren't used to these in the south so it shuts everything down). Workers had to be re-routed to other projects in the fallout of the weather events. Accordingly, the project took about 10 weeks longer than expected.

Recent appraisal returned at $695,000, which leaves $280,000 in equity.

Lessons learned? Challenges?

Initial expectations for appraisal was around $525,000 so decisions were made regarding quality in some areas. One of those, as an example, was not updating very old and very unique cottage style windows in a few places. The cost to do this was around $13,000 but they are so unique that I've never seen anything like them; very beautiful and huge conversation pieces. Lesson: don't go cheap on high end projects if the margins are there.