Hi all,
This is an update to my post https://www.biggerpockets.com/...
Well, I actually did it! My road trip was very fun and I learned quite a lot. Thank you to all those who I met and received help from along the way, including some of whom I've actually met here, couldn't have gotten this far without you.
Now for the meat. I ended up purchasing a property in Middletown OH on November 1, I've attached a video of it here. It is a duplex with a 2 car garage, cute backyard and I think the location is nice. Middletown is situated between Cincinnati and Dayton, and I felt that the investment would benefit from renters who might have business there or in the surrounding areas. I especially felt good about all the good trends we're seeing in markets in Ohio. Finally, it was a price that I could afford. When I saw it, my agent convinced me that it would be a stellar starting investment property because, as you can see from the interior photos, the property would have needed minimal work and we could have gotten it rented right away...or so I thought.
After our offer was accepted, I ordered an inspection and everything looked good except for a bright red flag regarding cracks observed in the foundation. Now, I was going into this endeavor prepared for a rehab project. I initially looked at properties that I could afford with the understanding that extra money would be needed to bring it up to speed, basically following the BRRRR blueprint. What attracted me to this property was the prospect of it being relatively turnkey, but upon discovering that the foundation was a problem, I just rolled up my sleeves and reevaluated my numbers. I figured a foundation repair would be like any other big item repair: just find a good contractor, pay the money, and get it done. The contractor I went with was referred to me by the agent who helped me buy the property. I fielded estimates from other contractors, but this guy was from a reputable company with good reviews and I decided to trust him. The estimate for the initial repair came back at about $6,500, and it involved repairing the rear wall cracks with urethane injection. I was also made aware that a future addition to the project would have to be undertaken to bring the stairwell into the cellar up to code.
Here are the number breakdowns. After some negotiations with the seller I acquired the property all-cash for $83,000 expecting to put in $6500 + about $2-3k to replace some windows, some electrical outlets, and other miscellaneous expenses. I was looking at all in about $92,000 to yield an ARV I was hoping to be at least $110-115k, possibly more, judging from the fact that this property is one of the very few duplexes in the area (notice how I don't have exact figures; a lot of my analyses came from estimating and hoping for the best, a behavior I realize is very rookie-ish, but I felt I had to act fast in buying what I still thought was a great deal). Rent-wise, I took from Rentometer that the apartments in my property could pull in about $650-$750 (for a target total of $1400/m or $16,800/yr). Using the 5%-10% rule for repairs, vacancies, property manager, and other miscellaneous bs, I calculated an expected yearly expense of about $4200. Subtracting from $16,800, and dividing that number by $92,000 I was looking to CoC return 13.7%. Not bad! If I could rent it, then refinance it and do it over again, I thought my path forward was clear. I just hoped somewhere in there I didn't screw up my math and I pulled the trigger.
So I then gave this contractor the green light to begin the work. I even travelled all the way there from NY to oversee the start (which was when I made that video). After knocking down a few pieces of the affected area, they discovered that the wall itself was too thin to meet code requirements and that that was the fundamental source of the problem. So now the entire project had to be scratched and a new plan to be devised. The cheapest possible approach, my contractor told me, was to install what's called a Rockwell egress which would entail replacing the entire rear wall, but also installing a new egress door which I figured would be a good thing when in the future we would need to move big system objects typically found in a basement in and out. What was a $6500 job now looked like it was going to become $15,000. By this point I had already bought the property and I just figured well at least with the new figure, my return would still be a great number for a 1st investment. So I told them to go ahead with it.
But now here comes the part where I feel like I'm running into a brick wall. I purchased this property on Nov 1, and as of today February 2, we haven't even put a single shovel into the ground. For the past 3 months, the contractor I hired has been giving me reason after reason (excuses?) for why mere beginning the project has to be delayed. At first, it was a snail moving process of getting the new planned I imaged above drawn up. Of course I am understanding of the circumstances, we're still in the middle of a pandemic so staffing at their office was frequently an issue, supply chain shortages and backlogs of necessary equipment, winter was upon us and the ground is frozen. But also came the complexities that come with this specific project. For one, it appears as though the scope of this work includes a requirement to attain a permit from the city of Middletown. Permit applications require a licensed engineer to draw up plans and I was told this process would take about a week or two. Well, almost 4 weeks later I had to insist on an update and according to my contractor, this individual did actually visit my property, but for a myriad of reasons was hard to get a hold of/not doing his job, and we experienced weeks of delays for this. Then the holidays picked up and I knew I wasn't going to get any progress during the week of Thanksgiving and perhaps a significant portion of the following week. I was patient, so I waited. Right before Christmas week, I was given news that we finally had the engineer report and that the permit would finally be applied for, but something or other error or complication - I'm not even really sure - prevented us from using the report and that we would have to find another way, and of course I wasn't going to get any updates through Christmas and New Year. Now we're in the middle of January and the plan was that my contractor told me he would have a meeting with a building inspector to see if he can get the engineer requirement for the permit application waived. This was also around the time that he told me he was feeling sick and needed to take COVID precautions. This was about 2 weeks ago and as of now I still have no update as to the status of this meeting.
Which brings me to a central point of my frustrations: my contractor is super slow to respond and at times I can go weeks with radio silence from him. I've spoken to him about this, and I try to be understanding, but I can't help but feel like I'm being taken advantaged of because he knows I'm a long distance landlord and that this is my virgin property. At the same time, I want to stick with him because we already "commenced" this project, deposit paid, rapport established, all contribute to a feeling of sunk cost. Also, from what I gathered, I am supposed to actually value the fact that he is hard to get a hold of - probably a busy contractor with other projects - as this is supposed to indicate that he is top notch...right? I have no desire to give this job to a bad contractor who does an inadequate job, so in my head I figured it's best to just stay the course. But what am I supposed to do in this situation that I'm in where I feel like I have no security that he has my best interests at heart? Of course when we talk he says he's working at getting things moving along, and I'm inclined to believe him, but with each passing week without any new developments, I don't know what to think. Is 3 months and counting a typical timeframe for a project such as this?
I resisted making an update post for the longest time specifically because of this, I didn't want to give you a bad update. I wanted to tell you all that I bought an amazing property and that my journey to financial independence was off to a rocking start. Well needless to say that's not the case. There are some positives though: after looking at the market, I'm pretty convinced that I made a good choice to buy this property if I eventually succeed in fixing this foundation. Like I mentioned, this property is one of the few duplexes in this area and even single family homes are going for higher than the 110-115k figure I estimated as an ARV. I'm also happy I bought this in all cash as the anxiety of having to shell out loan payments on a property that isn't anywhere close to ready to producing an income (I'm not comfortable renting until this problem is fixed) would have put me in a very bad mental state - and now that I think of it, a bank probably wouldn't have approved a loan with this problem anyway. But above all, I see this as valuable learning experience, however as I'm still slogging through this endeavor, it's hard to see what the lessons are yet, as most of my troubles appear to be outside my control. So finally, with humility, I'm posting this update here to ask you all what you think I should do next to get this process moving along and to give me hope that I can see the light at the end of the tunnel.
Thank you for reading. Thank you for answers. I hope the rest of you are off to a happy and profitable new year!.
- Marvin
