Author Topic: Real Estate - Big House, Big Investment, Big Profit?  (Read 2539 times)

Rufus.T.Firefly

  • Bristles
  • ***
  • Posts: 266
Real Estate - Big House, Big Investment, Big Profit?
« on: August 26, 2016, 10:52:41 AM »
Looking for advice from some money-savy, DIY'ers out there.

Here's the stats:

The house is asking 260K. It's a dump. When fixed up, it will be worth 325-350K, easily (tax value is 350K). The house is 3300 sq ft., 4 Beds, 2 Full Baths, 2 Half Baths. Finished Basement. Built in early 90s. It appears structurally sound. No obvious mold, water damage, or major cracks in foundation. Exterior seems good. The interior is A LOT of work. Every room needs: new flooring, remove popcorn ceiling, tear down wallpaper and paint. Kitchen needs remodeled, all bathrooms need remodeled. The whole house smells pretty bad and is kind of a wreck. The A/C wasn't running while there, so my best guess is it doesn't work. The house could be great if someone put a lot of money into it. We definitely could not live in it "as is."

Right now, we have about $80,000 total liquid money for the house search. Although, I wasn't necessarily planning on using all of it originally.

Here's some context:

This will be our first house for my wife and me. We've scouted out many areas and decided on where we want to be. Good neighborhood, good yard, great old trees, etc. This house is right where we want to be. We're in our mid 20s. We have no kids yet or in the immediate future. We do plan to get dogs soon.

We're open to doing most of the work. Father-in-Law is a contractor, my Dad has home renovation experience too. Other houses we are looking at have half of the sq footage (1500-1800) for nearly the same price (225-250K). But they are fully upgraded/renovated.

Originally, we planned to put down 20%. For this house, we'd need to set more cash aside for the work or take out a larger loan. This worries me a bit. I love the rates right now, of course, but it's still more leverage On the flip side, it's an opportunity to build a lot of equity quickly. Lastly, the house is way bigger than we need. I would be okay with as little as 1200 sq ft. The extra space does present an opportunity to do AirBnB and make some money back. And we might grow into or sell if for the equity down the road.

I feel uncertain about the amount of work and cost it would entail. Also, I don't want to wind up "real estate rich" and "cash poor."

What would you do? What factors do I need to be considering?


thedayisbrave

  • Pencil Stache
  • ****
  • Posts: 700
  • Location: Raleigh, NC
  • CFO @ My Life
Re: Real Estate - Big House, Big Investment, Big Profit?
« Reply #1 on: August 26, 2016, 11:50:42 AM »
Sounds like a lot of work.  Have you ever rehabbed a property before? I've done light rehab on some of my rentals and even then, I vastly underestimated the amount of work it would take (and I even hired most of it out). 

You would likely need the cash for the repairs, so you probably wouldn't be able to put down much... on a house that you know is already more than you need? You don't mention your occupation.. would you be able to be on site to over see everything? or you would you have to hire a GC on top of it?

"Big profit"... well home equity isn't necessarily profit.  It doesn't become profit until you go to sell. 

If you feel uncertain... I would go with your gut. 

ketchup

  • Magnum Stache
  • ******
  • Posts: 4016
  • Age: 28
Re: Real Estate - Big House, Big Investment, Big Profit?
« Reply #2 on: August 26, 2016, 12:03:10 PM »
If you're seriously considering this, talk to your father-in-law and get at least a ballpark of your costs (and time, that's worth something).  Also, verify that your after-repair value is accurate (look at comparable properties and be conservative).  Get a real estimate of your costs before going any farther.

You could very well end up spending, say $80,000, to increase the value of the house by say, $60,000, and getting a giant headache out of the deal while not making any money.  You'd be better off just spending the extra 60k on another house and not having to worry about it.

Most rehabbers look for more "meat on the bone" disparity between purchase price + rehab budget and after-repair value.   If you could get the same house in the same condition for maybe $200k (just making up numbers) then you'd probably be solid.

It certainly doesn't look on the surface like a good enough deal to warrant buying far more house than you need (you said you'd be fine in 1200 sq ft).

frugaliknowit

  • Handlebar Stache
  • *****
  • Posts: 1671
Re: Real Estate - Big House, Big Investment, Big Profit?
« Reply #3 on: August 26, 2016, 12:03:49 PM »
Not enough information to evaluate.  I would do a case study:  http://forum.mrmoneymustache.com/ask-a-mustachian/how-to-write-a-'case-study'-topic/, plus you need estimates on the cost of the rehab.

Keep in mind:  Everything else being equal, the greater the square footage, the higher the on-going costs (maintenence, taxes, etc.).

Shooting from the hip (without a case study):  $80k in cash for acquisition plus rehab sounds like a pittance for such a project.  If you make, say $500K, doing an acquisition/construction loan might be viable...
« Last Edit: August 26, 2016, 12:05:30 PM by frugaliknowit »

Rufus.T.Firefly

  • Bristles
  • ***
  • Posts: 266
Re: Real Estate - Big House, Big Investment, Big Profit?
« Reply #4 on: August 26, 2016, 12:06:22 PM »

Sounds like a lot of work.  Have you ever rehabbed a property before? I've done light rehab on some of my rentals and even then, I vastly underestimated the amount of work it would take (and I even hired most of it out). 

You would likely need the cash for the repairs, so you probably wouldn't be able to put down much... on a house that you know is already more than you need? You don't mention your occupation.. would you be able to be on site to over see everything? or you would you have to hire a GC on top of it?

"Big profit"... well home equity isn't necessarily profit.  It doesn't become profit until you go to sell. 

If you feel uncertain... I would go with your gut. 

To the bolded part, yes, I feel the same way which is why the only short-term financial benefit would be to do AirBnB or something similar. I looked up AirBnB rates; in my area, the run $50/night and the best spots are booked through September. But that's more work, of course.

I haven't personally owned a rehab project; my parents bought a 100-year old house when I was a kid/teenager. It required a total renovation. Half of the work was DIY and half was hired out. Based on that experience, I'm under no illusions - I think it seems like a lot of work too. I'm self-employed so can make my own work schedule, no problems there. And my FIL has offered to come down to help.

Those are the plus sides, but I can't help the nagging feeling that we'll wind up in over our heads.

Pigeon

  • Handlebar Stache
  • *****
  • Posts: 1199
Re: Real Estate - Big House, Big Investment, Big Profit?
« Reply #5 on: August 26, 2016, 12:24:08 PM »
You need a much better estimate of the renovation costs, and you are very lucky to have a contractor in the family to help.  Kitchen and bath renovations can vary hugely.  It sounds to me like you probably don't plan to stay in this house long-term if it's so much bigger than you need.  If that's the case, you probably want to renovate up to the standards of the neighborhood.  Do you need new cabinets, quartz countertops, new hardwood, taking out walls, etc.? You might be looking at close to $80K right there depending on the size of the kitchen and what's the norm in your location.  Taking down wallpaper and painting is cheap, but new bathroom fixtures can be pricey.  Popcorn ceilings are ugly, but in many places are the norm, and wouldn't necessarily have to go if you plan to move a few years down the road. 

I'm wondering why the house is such a wreck for only being build in the early 90s.  That seems to me to not be terribly old to essentially need everything replaced.

Rufus.T.Firefly

  • Bristles
  • ***
  • Posts: 266
Re: Real Estate - Big House, Big Investment, Big Profit?
« Reply #6 on: August 26, 2016, 06:48:03 PM »
Thank you everyone on here for your feedback. I think the overly-optimistic renovation cost is $50,000, according to the listing agent. I'm guessing it likely is closer to $75,000 based on crunching some numbers tonight. And that's without any nasty surprises.

My initial gut feeling was hesitation, but it wasn't sure if I wasn't just being pessimistic. I figured that coming on here would either confirm my leaning or slap me around with a dose of optimism.

I think the net result is this is going to be a lot of money and very time consuming. Glad to have a clearer picture now. Thank you for that! So I think we'll let this opportunity (or disaster) pass us by.

It's amazing that such a relatively new house can go downhill so quickly. It was actually kind of sad. Could be a great house - I hope an investor picks it up and flips it.

cchrissyy

  • Pencil Stache
  • ****
  • Posts: 743
  • Location: SF Bay Area
Re: Real Estate - Big House, Big Investment, Big Profit?
« Reply #7 on: August 26, 2016, 07:07:16 PM »
That place is HUGE for two people.   I mean, if you want to do a rehab and re-sell thing, as a side business, and live in it while under construction, well OK cool as long as the numbers work out.  But pouring all that money into a 4 bedroom 3 bath house just so you can have equity on paper, not selling, and have the uh, "opportunity" to pay the normal bills an oversized house brings with it...   I'm with whoever said it's not profit until you sell.

Bottom line, this sounds like a risky plan that ties up lots of money. It is more house than you'd ever need if you were just buying a house for yourselves.  And is not ideal as a rehab/flip project either.  Run away!

SwordGuy

  • Walrus Stache
  • *******
  • Posts: 5785
  • Location: Fayetteville, NC
Re: Real Estate - Big House, Big Investment, Big Profit?
« Reply #8 on: August 26, 2016, 07:46:19 PM »
Unless your finances are rock solid I wouldn't do it.  .   

Not with those numbers.

Now, take another $80k off the purchase price and then maybe.

Unless real estate values take a dive and then you would at least break even if you had to sell.

You might do better putting all that time and energy into your careers or a side gig that would make you money.

dess1313

  • Bristles
  • ***
  • Posts: 441
  • Location: Manitoba Canada
Re: Real Estate - Big House, Big Investment, Big Profit?
« Reply #9 on: August 27, 2016, 01:14:42 AM »
Looking for advice from some money-savy, DIY'ers out there.

Here's the stats:

The house is asking 260K. It's a dump. When fixed up, it will be worth 325-350K, easily (tax value is 350K). The house is 3300 sq ft., 4 Beds, 2 Full Baths, 2 Half Baths. Finished Basement.

........
I feel uncertain about the amount of work and cost it would entail. Also, I don't want to wind up "real estate rich" and "cash poor."

What would you do? What factors do I need to be considering?

I rehab'd my house from the drywall inside.  I bought low and didn't expect to go as far as i did in renos. 
I spent between 25and 30k in renos.  mostly materials since i did a lot of the work myself, or had family help.  this rehab was 2 heavy years of always in construction and another year of tweaking and minor jobs

I estimate i've increased the value of the house by 60-80k however.  so for every dollar i invested, i have at least doubled its value.  Basically paying me for my time which was never factored in the above costs.  Maybe that's not enough for some but its my longer term house and first time house as well.  i could have cut back in some areas but i see myself living here for many years.

It sounds like that if you invested 70-80k in rehabing it, you'd raise its value by about 65-90k.  there's not much of a margin there.  i am doubting all your estimated costs are paying you a 'wage' to do this.  that's also with your estimated ballpark sale price after its done.  you're doing all this work to not get a massive increase in value.  tax value also means little or nothing.  markets crash and boom for many reasons.  you'd have to compare to similar listings in your area to see what the real prices are, and if there are any huge lots of houses on the markets making it harder to sell

If its also unlivable, you have to consider you're paying double the living costs, since you have to live away from your rehab home while its being fixed up.  if its only a month or two, that's okay but if its 8 or 9 months that gets expensive paying double the living costs

also, once you get going, you can't sometimes stop.  leaving one room in old style will ruin potential sale value.  if you're fixing it up for a ready to move in, no one is going to want to look at those last 2 bedrooms with shag carpet in them.  people that want ready to move in want it ALL done.  its also harder to match paint and flooring afterwards if you don't know the source of the original items