Hey everyone! I am pretty new to posting in the forums but I have been reading and learning for about a year now. I’d love some input on a couple of different things with my first investment property. Any help from all you experts would be so greatly appreciated. I’ll provide an overview of the background and then if you need more info please advise. It’s going to be a long post, but then later I can just link this for background when I have more questions, so please forgive me the length. :-)
The property is a HUD home in a decent, well established neighborhood that I have targeted as one of my acceptable neighborhoods. My personal goal for my RE business is to only buy flips or holds in neighborhoods that I would be O.K. with living in myself. It might not be for everyone, but it's what I feel is right for me. My goal specifically for this house is to LEARN, and to get started- so with that in mind, and because I am able to pay cash for the house and repairs, I will be satisfied if I only break even, but of course ultimately if I make any type of profit, that's great. I feel that the experience, and getting out there and "doing" is worth every bit as much as actual cash return. So, the house- really nice house, 1500sq ft 2 story Dutch Colonial style, quiet tree lined street with a high % of owner occupants and right down the street from a planned development that is very anticipated and also down the street from the main shopping/restaurant area which is very quaint and well-liked. It's also very near to a major hospital and University, so that's an additional bonus. It is a 3Br with 1 full bath, a half bath and a toilet plumbed in the basement ( I don't feel right calling that a half bath, it doesn't even have framing around it or a sink). After my bid was accepted (33k, which was 89% of HUD's list price), I had it inspected – I was fortunate enough to find a very amazing inspector with years of experience in inspection and engineering, and taught inspection/wrote manuals- and he does a walk through inspection for a reasonable fee where he basically sizes everything up. The house was winterized, and HUD noted that they had done an air pressure test on the plumbing, and it was considered a fail. My inspector said based on everything he saw it wasn't going to be a big issue, but it kind of the one "unknown" that I have. Everything else was a lot of "smaller" items, and he said the house has clearly had a decent amount of work including basement waterproofing/sump pump, new electrical/box, newer roof, etc. I have a good sized list of things to repair, such as replacement window seals, grade the front yard, drywall repair in some of the rooms and ceilings, and then the bigger things that I would do, such as a kitchen renovation and paint/flooring. I went home and did a very comprehensive budget, and spent hours crunching the numbers- both as a flip and a hold (rental). I used the calculators on BP, and I'm pretty confident in my numbers. With the budget, I added 25% to everything that I was even slightly unsure of so that I'd have two ways to look at it, - "on budget" and "over budget". Some of it will be a judgment call- what grade of flooring to get, whether to have downspouts re-routed, trees trimmed, etc.- my plan is to do all the "musts" first and leave the more subjective stuff to the end. The question for this post relates to the furnace- whether it is a "must" or not.
Right now this is what the #s look like (the ARV is a low estimate- I talked to two agents who both ran comps for a renovated house in this neighborhood and said initial listing should be 95k-110k depending on finishes, but I want to underestimate): Initial selling price – 33,000, closing costs $1500. Budget for rehab= $22000 on low end, $27600 on high end (with 25% buffer on many items). Monthly holding costs for 180 days (giving myself lots of time to do it and learn) - $1668.00 (includes electric/cable/alarm monitoring/water/trash/insurance/lawn and snow maint and 5% general maintenance figure). ARV = $80K. After agent fees and closing costs, this puts my estimated profit as a flip at $10,000.00 if using the "over budget" figure. I also ran the numbers for rental, and they were acceptable even figuring for a lower rent than I think I could get (and higher vacancy, expenses, and CapEx rates than probable).
Soooo… finally, the question for this post. One of the “big ticket” items in this house is the furnace. It is operational, and there is a new A/C unit and ducting, but it needs to be replaced per the inspector because of its age and the fact that is a “convection” style furnace. I budgeted $5000.00 for this -having just replaced my own home furnace at a cost of $3700 for a larger home with higher quality furnace, I figured this number was safe. But now I wonder- would this be a deal breaker for a potential buyer, since it’s functional? I think I would certainly replace it if I was to rent the house, for safety reasons and to avoid anyone being stuck in a cold house if it broke down. But, if I am selling it, wouldn’t it be smarter to wait and see- because if I got a higher price/full price offer, and they said contingent on replacing furnace, I wouldn’t really be worse off since I budgeted for it. And if they don’t, it’s an additional 3500-5k in my pocket. I also recognize that “new furnace” on the listing sounds good, especially to buyers in this price range that might not have a lot of disposable income each month. But, I also will get to put “new flooring/newer A/C/newer roof/new kitchen” etc. on the listing anyway.
It’s stuff like this that I need guidance on… I have done my homework and feel pretty good about how the numbers should be evaluated, but this is one of those things that's more of a grey area for me since I don't have the hands-on experience. Hoping that someone can give me a perspective! You are also welcome to poke any holes you want to or ask any questions about my calculations and assumptions because I want to know if I missed something- I am all about learning, and I am sure I’ve got a lot to learn! The only thing I don’t want to hear is “don’t invest cash”… sorry guys, not sold on that idea and may never be, since I personally know some very successful investors who have only used cash and never leverage, as well as few that have done both. Thanks in advance for comments!
