Does this RE deal sound good?

[thefed]

I always have an ear to the street for good RE investment opportunities. I have a line on one that I think might be a winner.

First, remember that this isn't California with grossly overpriced homes. I found a small (800 sf) 1 bedroom slab home in Akron that needs rehabbed for $16k. Taxes are 1400/yr (double lot). County appraised value is 46k, comps are coming in around 50k. Might be able to make a 2nd bedroom out of the wierd layout,m which would help when reselling.

I can repair everything for under $10k...no problem. I have a close friend who's willing to rent it for 500/month while it's put on the market to sell. He may stay longer if he likes it, but is willing to do the small restoration stuff while living there (tile floors, cabinets, bathroom fixtures, paint, landcaping etc)

It's not the best area, and definately not the worst. I dont like the idea of collecting rent, and really dont like the idea of selling a one bedroom home ...they sit too long.

All in all, I would sink about 26 into a home I 'could' sell for 46k. While I hold it, rent would provide me a cash flow of about 150-200/month (160/mo interest only HELOC, 130/month taxes and insurance).



PROS: 20k equity, 150-200/month cash flow, 300/month piti is very low if not rented, break even for a year would be 40% vacancy.

CONS: ONE bedroom, harder to rent or sell, not the best neighborhood for attracting quality tenants

my intentions are to buy a home, and flip it for at least a 10k profit. If not, rent with a cashflow of 200/month.


What do you all think? I hear a lot about the pitfalls of renting homes, but that's why my first p.o.a. is to sell it right away. Renting is the contingency, unless my friend would liek to stay there.

 

[Nords]

First, remember that this isn't California with grossly overpriced homes.  I found a small (800 sf) 1 bedroom slab home in Akron that needs rehabbed for  $16k. Taxes are 1400/yr (double lot).  County appraised value is 46k, comps are coming in around 50k. Might be able to make a 2nd bedroom out of the wierd layout,m which would help when reselling.

As long as you're going into a rehab with a bigger lot, what about expanding a wall into a 2nd BR with perhaps a 2nd (public) bath?

 

[renferme]

I wonder if Akron is a "flippable" area ?
Will your friend move in right away or after it's rehabed ?
Can you really count on him to move in and out when you want ?
Or will he change his mind and not rent it ?
About how long will it take to sell ; a realtor might be able to answer that question.
Every month it sits costs you $300.

 

[cute fuzzy bunny]

Sounds like you know the basic issues.

What 'rehabbing' does it need? I would think a house that you can buy for $16k would cost 10k the minute you looked at it.

Add to that for surprises. Putting on some siding and finding rotten 2x4's. Termites. Pulling up a carpet and finding a rotten floor...or a bunch of asbestos tiles.

How old is it? Homes older than 1980 frequently have a layer of lead paint on the walls, maybe buried under a few other layers. Homes much older than that sometimes have lead pipes, asbestos floor tiles, asbestos pipe wrapping, etc. Unless you're willing to tear that out with respirators and dispose of it 'correctly', you have to pay a hazardous materials company to come in and remove it.

What kind of plumbing? If its old galvanized pipe and cast iron drains, you might be spending $3-4k on new pipes. Windows in good shape? Could be another 1-2k. Roof? Another grand or two if the sheeting is rotten. Any mold? Pest inspection show anything?

Is the slab in good condition? Any big cracks or settlement? Concrete still solid? Any white stains on it (effluorescence)?

Is the house up to code? How is it zoned? Will adding on to the original property cause anything bad to happen tax-wise or require an expensive building permit? Any endangered species known to frequent the area?

 

[thefed]

I wonder if Akron is a "flippable" area ?
Will your friend move in right away or after it's rehabed ?
Can you really count on him to move in and out when you want ?
Or will he change his mind and not rent it ?
About how long will it take to sell ; a realtor might be able to answer that question.
Every month it sits costs you $300.

Anything is flippable if you get into it for the right price. From what I can see, 25k on the table, and letting it sit 1yr @ 300/mo = 29k. Realtor fees on a 45k listing= 3k totalling 32k in it. If I sell it even for 15% under 'retail' that's 38k, with a 6k profit. That's collecting NO rent ever, and it sitting one year, and paying a realtor.

I dont think it would sit a year, nor do I think I would never collect rent....


As far as adding on....I'm considering it....only if I could do it myself. I think it could be a viable option.

 

[renferme]

ok , put in 32k, sell for 38k, that's about a 20% profit.
anything above 38k, makes the profit all that much better.
A lot of work; but if you enjoy it - then go for it.

 

[Nords]

As far as adding on....I'm considering it....only if I could do it myself.  I think it could be a viable option.

Aaaaaahh, contractor hell!

Good luck with that.

 

[Arif]

I plugged your figures into my spreadsheet I use for flipping properties and you should make about 16k assuming the numbers you gave are accurate. I would go for it but without the renting part unless you can't get it sold in say six months. Just factor the mortgage pmt as an expense during this period. The more complicated you make it the more there is an opportunity for the deal to go sour. If your friend rents it out and doesn't want to leave even though you've got a buyer then what? I would add a few thousand for unexpected things that need to be repaired but did not see during the inspection. BTW- my profit figures factored in paying a 3% closing cost for the buyer of the property.

 

[Martha]

Sounds like you know the basic issues.

What 'rehabbing' does it need? I would think a house that you can buy for $16k would cost 10k the minute you looked at it.

Add to that for surprises. Putting on some siding and finding rotten 2x4's. Termites. Pulling up a carpet and finding a rotten floor...or a bunch of asbestos tiles.

How old is it? Homes older than 1980 frequently have a layer of lead paint on the walls, maybe buried under a few other layers. Homes much older than that sometimes have lead pipes, asbestos floor tiles, asbestos pipe wrapping, etc. Unless you're willing to tear that out with respirators and dispose of it 'correctly', you have to pay a hazardous materials company to come in and remove it.

What kind of plumbing? If its old galvanized pipe and cast iron drains, you might be spending $3-4k on new pipes. Windows in good shape? Could be another 1-2k. Roof? Another grand or two if the sheeting is rotten. Any mold? Pest inspection show anything?

Is the slab in good condition? Any big cracks or settlement? Concrete still solid? Any white stains on it (effluorescence)?

Is the house up to code? How is it zoned? Will adding on to the original property cause anything bad to happen tax-wise or require an expensive building permit? Any endangered species known to frequent the area?

Odds are it is not up to code, has old plumbing and electric, old windows, has a damp basement and lead paint somewhere. CFB, you have been in California too long. Eastern housing stock is much older and houses sell with their old windows, plumbing, electric, lead paint and all. In my part of the country, if you don't have a damp basement with some mold in it, that is unusual.

I would worry more about serious structural issues, such as bad leaking roofs, bowing basement walls, or walls and floors way out of kilter. Also, in some parts of the country if you do a significant amount of work on a property, the entire property might have to be brought up to code. Otherwise, generally property does not have to be brought up to current code, only the new work has to be to code.

 

[thefed]

To clarify some things:

first off, it's a slab home...ie no basement. That's partially why I looked at it....basements are a headache!

Secondly, I just went back to look @ it, and here's what it needs. About 1/2 the windows are still wood, the other 1/2 have been replaced. IF I have soemone else do it, it'd run about 275 each, and there's 6....figure 2000. Has new vinyl siding. Some of the subfloor is rotted and warped....lots of labor to be supplied by me and my friend, and say 500 for supplies. Flooring house-wide (cheap carpet, vinyl tile) figuring 1000. I can do the tile in bathroom and kitchen. Roof looks okay, but bows in the middle...pay someone 2000 to replace the bad wood and re-shingle (small roof!). Bath/kitchen fixtures are okay, might need a cabinet here and there, and a lot of the plumbing is exposed, and looks like an afterthought (maybe someone stole the copper in the past??). I figure 500 to re-route these pipes with some pvc and hide them well. Furnace and electric look okay, hot water might need replaced....I'll figure 1000 for new hot water and maybe furnace repair (never know til you turn the stuff on!). Planning on another 500 to DIY a wall tear down to expand what WILL be the second bedroom. It's a 8x9 room with no closet. I can take the wall down and add about 3x8 feet of space, including a closet (i think the wall is NOT load bearing, but will check first, of course).That brings me to about 7000, with 3000 for misc stuff. I'm sure at least 1000 of that would be used (landcaping, paint, etc). Minimum 8000, max 10000.

The house to the left and right of this one are freshly sided with vinyl and look nicely kept. This home is a large lot for the city (38 x 130) and its set WAY back (only a 10 ft back yard, but a 80 ft front). One neighbor is similar size, but two beds, and sold for 50k recently. If I do this right, this can be considered a two bedroom home.

My friend definitely WILL stay in the home while fixing it, and that will be a bulk of my labor. I will figure on 6 months vacancy before selling. However, he has expressed to em that he will rent it @ 500/month for up to 6 months after its done being rehabbed.



I think I will offer about 14k and go from there. I have a second, larger home I'm looking at .2 miles down the street for 14k. It needs a bit more work, but has a dry basement (from what I can tell) ALL new electric, updated kitchen, and new sheetrock house-wide (to eliminate lead paint). All the sheetrock needs taped and finished. all windows are new. The majority of the work is in the drywall, and luckily, my father is a drywall contracter/painter...maybe I could get some cheap labor The basement isnt too pretty, but is currently dry as a bone. Furnace needs replaced as does hot water. It's been added on to, and has 2 poss 4 beds. It's about 1200 square feet vs 800 in the other.

 

[cute fuzzy bunny]

Biggest concern I see is the bowed roof. Either the supporting roof studs or the load bearing walls below are rotten or have been eaten by something. That could be very expensive to fix. The rotten subfloor is also concerning. I'd take a long thin probe like a flathead screwdriver and test the bottom plates if you can find a way to access them. Maybe if theres a little room below the baseboards, or pull off a baseboard with the owners permission. Corners and/or areas near the subfloor rot are good to check. Inserting the screwdriver just above the slab level, horizontally, you should hit hard wood right behind the sheetrock where the horizontal 2x4 or 2x6 should be. If its mushy, theres nothing there, or your screwdriver comes out with green or black stuff on it, look out. You'll have to tear off the interior or exterior walls, jack up the house, replace the bottom plates and at least the bottom of the studs. Big stuff and tough to do unless you're very experienced with home repair.

 

[tryan]

I would go for it but without the renting part unless you can't get it sold in say six months

The numbers look good. I would go for it; rent it for a year then flip it. Holding it for a year will give you a long - vice short - term capitol gain. This will put ~15% of the profit back in your pocket. Holding it also allows time for a larger gain. When you buy property for 16K the down side risk is very small.

 

[thefed]

thanks for the advice fuzzy bunny.

I am still trying to figure out the subfloor issue. Some of the house in right on a slab, while some is over a shallow crawl space. It's areas, of course, over the crawl space that are warped a bit. Not weak, or soggy, just warped a bit.

I saw NO evidence of water anywhere in the home (dryawall, plaster, ceiling, quick look in the attic standing on a stool with a weak flash light). But i did notice the decking a bit warped on the roof.

I'll test those base plates tomorrow and see what I come up with.

thanks

 

[thefed]

The numbers look good. I would go for it; rent it for a year then flip it. Holding it for a year will give you a long - vice short - term capitol gain. This will put ~15% of the profit back in your pocket. Holding it also allows time for a larger gain. When you buy property for 16K the down side risk is very small.

That's what I'm thinking....the downside is minimal.

What are the tax implications on long vs short term cap gains?

I thought I would 1031 if I do sell this, to defer taxes. would the length I hold it effect taxes in that situation?

Thanks

 

[yelnad]

DH and I flip properties. We would definitely go for this, but to be fair, we tend to buy things that no one else will touch.

 

[modhatter]

My experience with doing re-habs for many many years, is that what ever I pencil out my cost to be on paper (no matter how thourgh I try and be), I can count on it costing AT LEAST 50% more, for all the unexpected. So if you figure you can do it for $10,000 COUNT ON IT COSTING 50% MORE. ($15,000 and you might be in the right ball park)

I have never been disappointed this way. I also would agree that changing it to a two bedroom would be wise if financially feasable.

 

[tryan]

What are the tax implications on long vs short term cap gains?

I thought I would 1031 if I do sell this, to defer taxes. would the length I hold it effect taxes in that situation?

Short term gains are taxed as ordinary income (28% for most of us ... but could be as high as 33%). Long term gains are limited to 15% (thanx to GWB).

No time limit on when you can sell into a 1031 exchange BUT the property bought must be like-kind. In this case a rental/business property. No guidance on how long the purchased property must remain rented ... I was told 1 year would suffice (before, say, it became your residence).

 

[bbuzzard]

Take it from an experienced structural engineer, vinyl siding frequently hides a rotted out wall structure . Be very, very careful about what you cannot see, especially when something is intentionally hidden.

 

[cute fuzzy bunny]

Yeah, I was thinking that too but I figured I'd already scared the pants off of him...thats why I suggested checking the bottom plates...any leaks would have created the worst rot there and around the window sills and casings.

 

[Arif]

My experience with doing re-habs for many many years, is that what ever I pencil out my cost to be on paper (no matter how thourgh I try and be), I can count on it costing AT LEAST 50% more, for all the unexpected. So if you figure you can do it for $10,000 COUNT ON IT COSTING 50% MORE. ($15,000 and you might be in the right ball park)

I agree that's why I say add a few thousand on top of his estimates. Things always pop up that you can't see until you get in their and start pulling walls down.

Short term gains are taxed as ordinary income (28% for most of us ... but could be as high as 33%). Long term gains are limited to 15% (thanx to GWB).

Don't forget you have to recapture the depreciation you took while you rented it. Not much in this case but just so others that try to flip also are aware of that additional tax.

 

[cute fuzzy bunny]

My wifes $10k remodel turned into 40+. A lot of that was my own fault for increasing the scope, but just staying with the original plan probably would have put us into the high 20's.

 

[thefed]

thanks for all the input. I've checked for rot and found none, just warped subfloor, and slightly uneven concrete slab. Why?

Walls are still square, peeled back some siding in a few areas and found nothing scary



On another property I've been looking at, there's ahealth code violation for lead paint. That befuddles me as 75% of homes painted before 1978 (ie 99% of homes in my area) have lead based paint. Since this one was vacant, and vandalized, the health dept tested and slapped a violation and order on it. The catch is, you cant simply paint over the lead paint (like 99% of homes in the city), it needs to be removed! WTF is up with that? Someone began a restoration by hanging ALL new drywall thru the home. All that's left are the ceilings, and the outside of the home. I wonder if vinyl siding would count as elimination?

Anyone experience anythign like this with the health dept?


Thanks

 

[thefed]

UPDATE: House #1 is out of the question. Too many variables that I wont be able to accurately estimate until taking possession (found new water leak...may be main water line coming up from a hole in the ground underneath crawlspace)

House #2 in the previous posts, and explained abovE(health department issue) is being bid on today. I am submitting a low-ball offer of 10,500 for the home, they are asking 14,900. Its been on the market for 55 days, and is bank owned.

I found a way around the health dept. requirement that a lead abatement specialist does ALL work involving any lead in the house(ie EVERYTHING that is painted!!!). I'm getting my lead abatement license in the state of OHIO by the end of april. It's about 800 in class and test fees, but can turn in to a nice side business!

Hope they say yes to my lowball offer!!!!!!!!!

 

[tryan]

Anyone experience anythign like this with the health dept?

I was not aware Ohio had lws against lead paint. MA is pretty strict (all chewable surfaces below 5 ft must be abated/replaced if a child <6 resides in the house). The expense is in replacing the doors and windows. Stairways can be wrapped with carpet.

Of the half dozen bank owned properties I've purchased I've found some banks favor carrying the note (figure this is where the $$ can be made for them) and will throw in special financing packages. Others just want OUT and are much more negotiable on the price - and will not carry the paper. Point being, if they do not negotiate on price, try to negotiate the terms of a loan (low rate/closing costs).

At those prices, you can't go wrong. Good luck!

 

[thefed]

Well, it's only a 'law' that 6 feet and under is abated or covered IF the health dept. tests the home. this home was tested because a little kid ate paint chips on the porch. Duh :

Stairs can be wrapped in carpet, and likely will be...you are correct. New siding going up will be fine. Rest of the home just needs painted. I offered 10k. They're asking 15k and def. paying 2500 in commissions to RE agents.

Here's the funn y thing: March 3rd, according to the county tax assessor, was the day that this property was recently sold to another financial institution. they paid, according to public record, 4100 dollars!!!! I looked this company up, and found out that they specialize in helping big lenders 'clean their portfolio's up for the end of the month or quarter". They take them off of the banks hands to make thier portfolios look better (they probably have negative equity @ this point). They keep it on the market with the same realtor to avoid pissing them off. Their realtor says "Just make an offer, they really want to move it..."

I offered 10k, 12k would be satisfactory, and about 13k is what I am counting on.

I've pulled 6 comps, and am coming up with about a 53k average selling price for this home when finished. I expect to have NO more than 30k in it with 12 months vacancy. Should turn a decent profit! I think if I sit on it (which I'm willing to do), I could get 60k for the thing. I'll post pics so you all dont think I'm a raving lunatic! 10k for a home, sell it for 60k with 15k rehab costs...hmmmmm....