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Fixer upper investment house situation
Old 08-09-2015, 09:58 AM   #1
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Fixer upper investment house situation

We retired in Jan and moved to South Florida a month ago. We have a huge amount of family here. We are renting a very nice 2700 sq.ft. house and are happy with it. We have a son who is about to be a junior and the schools are excellent here. Our plan is to stay here 2 years and then see what happens when he graduates. He has talked of joining the military. He might go to college. Who knows at this point? We have no plans of buying a permanent house anytime soon. Our plan is to start doing extensive travelling once he graduates. We plan to rent for 2 years and then depending on what our son does, put everything in storage and begin travelling by living in furnished places for a few months at a time in different places. After a year or more, come back to Florida, rinse and repeat.

We have been interested in flipping houses for a long time. I have quite a bit of remodeling experience. We don't need the money from house flipping. We are more interested in the challenge and of course the profit (if we do it right) will be nice.

The house directly behind us is a foreclosure. I have no idea how long its been sitting empty and have the real estate agent that found us the house we are renting looking into it. Its very close to the same layout as the house we are in but needs remodeled.

This is all VERY preliminary. Similar houses are going for around $410-$425,000 without everything being brand new. My original idea was to try to buy the house for $310,000 which I think is possible and put $40,000 into it. After fees and commissions I think I can make around $40,000.

This is a tough crowd who will find problems with any plan so I want to see what you guys come up with that I haven't thought of yet. What do you think of this idea? The biggest risk for any flip is that I cant sell it quickly or for as much as I want to get for it. If I time it correctly and it is done about the same time as our lease is over and we have problems selling it right away, we could move into it instead of continuing to rent our current house for another year.

We are renting for $2980. If we put $30,000 down on the house and $40,000 in cash for the remodel, we have $70,000 invested. Monthly payments including taxes and insurance will be about $2000 / month. We would be saving $980 / month over renting the current house which gives us a return on our $70,000 of 16.8% in that first yr. This doesn't account for income tax savings. Not sure how PMI works. I need to think more about that. We may need to pay PMI and then refinance once the remodeling is done and we have significant equity in the house. We would pay commissions when we eventually sell the house but that is already accounted for in my profit estimation if we flip it and sell immediately. Real estate is still recovering in S. Florida so its likely that we could get a better price if we hold it that extra yr. Price per sqft is up 7.6% since this time last yr.

Anyway, the plan would be to buy and flip, but do you agree that plan B significantly reduces our risk if the house doesn't sell quickly?
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Old 08-09-2015, 10:23 AM   #2
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Are you planning on doing the remodeling yourself or contracting it to be done?

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Old 08-09-2015, 10:43 AM   #3
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PMI rules have changed significantly in the last few years. 40,000 dollars doesn't buy what it used to and that number might grow rather quickly as you remodel. I recall you were recovering from some physical issues at the time of your move, this might prevent you from doing as much work as you plan on the house and/or cause you more physical problems.

If you hadn't said "we have no plans to buy a permanent home soon",the idea that you like the neighborhood and the area and are paying rent might swing the pendulum in favor of buying and fixing that home. Perhaps you might do this, remodel the home to your tastes and if your traveling plans work out, find reliable renters for one year at a time. In fact, my DH and I have found out that many of the plans we made for ER are changing and evolving as we go and I suspect the same will happen with you. We have found that living in someone else's home for months at a time is not very appealing to us personally.Also the idea of boxing up ALL our personal possessions and paying to store them is very unappealing. I remember you were surprised at the size of the truck you needed for you recent move. Just some food for thought.
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Old 08-09-2015, 10:52 AM   #4
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Originally Posted by omni550 View Post
Are you planning on doing the remodeling yourself or contracting it to be done?

omni
I know how to do most everything that you don't need a license for (like plumbing and electrical). We would plan to do some things ourselves, like painting, lighting fixtures, sinks, toilets..ect. I know how to lay tile, but that's how I hurt my back so that's not gonna happen. However, DW is a work horse and wants to install the flooring and has done some in the past. I don't think she realizes how much flooring there is to do though, so we will see how that goes.
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Old 08-09-2015, 11:00 AM   #5
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I think you need to sit down with someone and discuss finances. Getting a $425K house for $310K and putting only $40K into it doesn't seem practical unless the house is in really good condition for a foreclosure. To do a flip, I'd think you be looking at trying to get the house for more like $250K and expect to put about $100K into it. Of course this is all from sitting at my computer and never seeing the house but my first glance opinion is you don't have a good handle on the dollars.

My wife and I started looking at foreclosures to fix and give to my daughter. We knew a little about real estate and a little about money. However, it wasn't until we hooked up with a family friend that knew how to buy foreclosures and fix them up that things started making sense. In your situation, I can easily see $50K more going out of your pocket if you don't know what you're doing. Get some personal professional assistance or leave it alone. It's a risky business.
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Old 08-09-2015, 11:00 AM   #6
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If I were to start flipping (and I have thought about it), it would not be in a home I also needed to live in. I have done some extensive remodeling in a few homes, and while you can do it in a way where it remains somewhat livable, it can grind on a person to live like that for a while. It's nice to "go home" after a long, messy day working on a house. There is no avoiding construction grime, so the wear and tear on your furniture has to be considered, and the extra ongoing cleaning of your belongings can be significant.

I would re-figure your approach based on not living there - if it's still financially doable and you like the challenge, go for it. Just one man's opinion, of course!
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Old 08-09-2015, 11:03 AM   #7
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Have you visited the home? How bad is it inside? Has it been a grow op?

All sorts of red flags are waving.
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Old 08-09-2015, 11:04 AM   #8
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If I were to start flipping (and I have thought about it), it would not be in a home I also needed to live in. I have done some extensive remodeling in a few homes, and while you can do it in a way where it remains somewhat livable, it can grind on a person to live like that for a while. It's nice to "go home" after a long, messy day working on a house. There is no avoiding construction grime, so the wear and tear on your furniture has to be considered, and the extra ongoing cleaning of your belongings can be significant.

I would re-figure your approach based on not living there - if it's still financially doable and you like the challenge, go for it. Just one man's opinion, of course!
We have no plans to live in the house while its being remodeled. I was talking about timing it so that the remodel is finished about the same time that our current rental lease is finished. At that point we will need to either renew our lease or move. If the investment house hasn't sold, we would move into it.
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Old 08-09-2015, 11:07 AM   #9
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Have you visited the home? How bad is it inside? Has it been a grow op?

All sorts of red flags are waving.
I can see inside thru the windows and see every room except for the master bath. Everything looks fine. It's just very dated. From what I can see, its all cosmetic. Obviously an inspection needs to be done to see if there is any hidden problems.
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Old 08-09-2015, 11:13 AM   #10
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I think you need to sit down with someone and discuss finances. Getting a $425K house for $310K and putting only $40K into it doesn't seem practical unless the house is in really good condition for a foreclosure. To do a flip, I'd think you be looking at trying to get the house for more like $250K and expect to put about $100K into it. Of course this is all from sitting at my computer and never seeing the house but my first glance opinion is you don't have a good handle on the dollars.

My wife and I started looking at foreclosures to fix and give to my daughter. We knew a little about real estate and a little about money. However, it wasn't until we hooked up with a family friend that knew how to buy foreclosures and fix them up that things started making sense. In your situation, I can easily see $50K more going out of your pocket if you don't know what you're doing. Get some personal professional assistance or leave it alone. It's a risky business.
From what we can see so far with the naked eye, the house just needs cosmetic changes. Granite countertops, new floors, fresh paint, fixtures etc. I see one wall that goes up 3/4 of the way to the ceiling that makes no sense. Knocking that out will make the house feel much bigger.

In all honesty, if the remodel cost $80,000 instead of $40,000 and we broke even, I would be fine with it. We aren't trying to do it for a living. We don't need the income. Breaking even on a first flip to see if we want to continue doing it would be fine with us. After that obviously we would want to start making money or it would be a waste of time.

We haven't put in a bid of $310,000 or anything like that. We are just tossing around ideas at this point and our real estate agent is doing some research on the property. If we could get it for $250,000, all the better. I doubt it sells that low though unless the inspector finds serious problems.
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Old 08-09-2015, 11:16 AM   #11
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I think the inspection is key. As long as there are no big ticket items like heating and cooling, roof, structural (termites, mold, etc.), most of the rest can be done at a reasonable cost by a competent DIY'er.
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Old 08-09-2015, 11:34 AM   #12
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You went from saying you thought you could clear 40K to saying if you just broke even you would probably be fine with it. How do feel about donating all your labor and possibly losing money? It sounds as though you would like a physical and mental challenge in your new location. How much stress do you think the process would cause you if the numbers start looking bad? Fixing up houses can be very satisfying and really give you a sense of accomplishment, we know from completely redoing our own house.

To get a better idea of the reno dollars needed, try to walk thru a few homes for sale and see what upgrades will be required to get top dollar. There are a lot of flippers in Florida there might be a reason this house hasn't been sold or flipped.
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Old 08-09-2015, 11:40 AM   #13
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You went from saying you thought you could clear 40K to saying if you just broke even you would probably be fine with it. How do feel about donating all your labor and possibly losing money? It sounds as though you would like a physical and mental challenge in your new location. How much stress do you think the process would cause you if the numbers start looking bad? Fixing up houses can be very satisfying and really give you a sense of accomplishment, we know from completely redoing our own house.

To get a better idea of the reno dollars needed, try to walk thru a few homes for sale and see what upgrades will be required to get top dollar. There are a lot of flippers in Florida there might be a reason this house hasn't been sold or flipped.
I said I think I can clear $40,000, but if the remodel ends up costing a lot more than I thought and we break even, I would be OK with it since its a first flip. I doubt everyone makes money on their first flip.

The main question I have is do you agree that in my situation, being able to move into and live in the house after its finished significantly mitigates my risk if it doesn't sell quickly?
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Old 08-09-2015, 11:48 AM   #14
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I said I think I can clear $40,000, but if the remodel ends up costing a lot more than I thought and we break even, I would be OK with it since its a first flip. I doubt everyone makes money on their first flip.

The main question I have is do you agree that in my situation, being able to move into and live in the house after its finished significantly mitigates my risk if it doesn't sell quickly?
Oh yes, definitely, and I would add it will give you many more options in case you decide you do want to live permanently in that area. Bearing that in mind, you might want to make sure that most of the improvements suit your personal tastes. The fact you are living in that development now and like it would be enough to convince me to do it in your shoes.
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Old 08-09-2015, 11:52 AM   #15
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With a recovering market, what makes you think the lender (or Fannie Mae) is going to sell it to you for $310,000? Fannie is likely to put in paint and carpet and ask $400,000 and the banks aren't selling houses at discounts now. It's likely to end up on an auction website with multiple bidders or listed with an agent at fair market value.
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Old 08-09-2015, 11:53 AM   #16
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A property with an estimate of $40k flip profit is not enough to bother with IMHO. You might look for properties with more potential upside ($100k or more). Otherwise the downside risk is too great.
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Old 08-09-2015, 12:37 PM   #17
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I am coming out of lurkdom to mention the Florida county and city permitting and inspection process. Doing a kitchen remodel in a nice area of Broward County caused me much time delays, project changes and upgrades needed to stay in code. And forget about resale if all code items are not approved.
Check with some locals to get more experienced advice in your area. It might be a breeze, but it could be a big surprise. Coming from my NY county, there was a world of difference, and it put me back months.
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Old 08-09-2015, 12:46 PM   #18
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If I was considering a plan like yours, my main concern would be all the hassle involved. I retired for a reason and I no longer want to work for money, even $40,000.

YMMV and does for many of us! But gosh, if I remember it correctly you just retired not too long ago and you haven't even had a couple of years to kick back and unwind yet.


Just buying or selling a house is very stressful, even without flipping. I can attest to that, having bought my dream house a little over a month ago, and closing on the sale of my former home imminently. I will be SO glad to have this over with so that I can return to my peaceful retired life.
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Old 08-09-2015, 05:06 PM   #19
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Several thoughts

Pros:
- Huge advantage that you live in the area since you presumably know it well and are VERY close to the job site. The commute to the job site eats up tons of time & $$.

Cons:
- I'd be much more excited about this if you said you'd want to build/find your dream house after DS leaves. Instead it sounds like you want to travel extensively starting in 2 years. If you want to travel, does it make more sense to plan to move to a "lock & leave" place like a condo or townhome? Just downsizing to something else could easily burn a year. If you are uncertain, it sounds like renting and not owning, especially something that requires cash outlay, is a great way to stay and go.

- Early sequence of return risk. Perhaps you don't worry about this stuff if your SWR is only 2% to 3%, but we're pushing almost 5% from investments only for the next 5 years before social security. So we are vulnerable to a lasting market downturn for the next several years. You'd have to front $2000/month plus $30K down, plus your $40K to $80K upgrades just to make $40K only when you sell, split between two w*rkers. So does the "experience" and 40K POTENTIAL profit justify the PITA factor, your and DW's labor hours, and financial risk? Obviously, this is very personal and only you can answer for yourself.

- Wear and tear marriage. Even if you're not living in the house, you and DW will have to run a stressful business to make this a success, let alone avoid losing money.

Unknows:
- Do you like negotiating, buying & selling, miss something like this from your old j*b? If you don't, then why go through the trouble of buying, fixing, and selling even if the fixing part is enjoyable.

- How long will it take for you and DW to flip the place? What happens if you double the time estimate, just in case. As for us, we ran 25% over budget and 100% over time. The only reason we're maybe 5-10% above break-even is that property values are rising and we remodeled one of our old houses with a modest remaining mortgage, so not an actual "flip". We would be losing money if we charged our labor hours, ouch...

- I appreciate the common suggestion here to wait about a year before making any big time or financial commitments. Sort of a cooling off phase. We're only 5 months in and still learning about our new ER lives.

- Data point: our realtor has been flipping since 2010. He's done over 50 units, seems like in about 3-4 months each, with a handyman crew.

Bottom line: seems like a reasonable opportunity if you really want to live in the house and customize to taste. Marginal if really want to travel soon and need to lump the heavy cash outlay & mortgage until sale.
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Old 08-09-2015, 11:36 PM   #20
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On one side, you could buy the house reasonably, recondition it and sell it for a moderate profit. And if the plan to flip the house didn't come through, you could always move into the house. That would be somewhat of a win-win situation.

But if I'm going to put my neck on the line, especially taking out a mortgage, I'm going to do the deal only if the house is a very advantageous purchase. You never know what you're going to get into--even with a house inspection.

I bought a house last Oct. so we could retain our sanity--getting our daughter and her two children out of our house. It was cheaper to buy the house than relocating to a different town.

The house is 2,800 square ft. with a 16' x 40' den and 20' x 24' playroom on a 270' flat lot within eyesight of our grandson's elementary school. The price was $105K, and it cost us about $7K to repaint and refloor 3/4 of the house. This is a beautiful house in a heavily wooded neighborhood and neighbors have lived there since 1960. Young families will replace the aging neighbors in the upcoming 5-8 years if not sooner.

I'm about 50% motivated--capable of only about 4 hours per day hard labor. If I am going to take on a risk to flip a house, I'll be buying a house like above--a very inexpensive house in a much more expensive neighborhood. And chances are it won't be in Florida where the cost of homeowners insurance and extremely high property taxes will eat up a big part of any anticipated profits. Real estate agents are unfortunately required to get into their multiple listing books.

Only do the deal if it's on your terms, and if you stand to hit a home run when you sell the house.
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