Is this how rehabbing works?
I'm *very* anxious to get started in rei. It appears that perhaps rehabbing is the best and/or easiest way to start. (Comments on that assumption are welcomed!) One of the criteria is little or no money out of my pocket, which I think I understand is entirely possible and realistic. (Again, comments welcomed).
As I believe I understand how this works, a nutshell outline of the steps involved in the correct order would be:
1. Find the rehab property – for round number’s sake, let’s say area comps are $120k, asking price on the property is $110k.
2. Get a qualified contractor, get estimate of cost to bring rehab up to comp level, say it’s $20k.
3. Get loan from hard money broker (?) at *comp* value of property.
4. Negotiate selling price with seller, say for example $80k.
5. Sell property to contractor for $90k. Contractor does rehab work, resells for comp value. I’ve made $10k on it (minus interest from hard money loan), contractor has made $30k on it.
Now assuming the above is correct, I realize that I could make more if I were able/willing to just pay the contractor to do the fixup/rehab, then resell myself, but allowing the contractor to do that allows me to pocket $10k quickly in this example, then go on to the next one.
Is this correct? Did I miss an important step? Or, is "flipping" an easier and/or less risky way to get into rei?
Thanks for any/all inputs.
Hi Re
I suggest you bargain for a better price
or find a stupid contractor.
If the contractor buys it for 90k, puts 20k
back into the property...........then he is back at the 110k price you first mentioned.
How long will he have to sit on it......
or rent it out.
Even if he gets more, unlikely, being in a 120k market...............not much room for profit on his part.
As a contractor myself, if I can't make at least 30% (and thats not all profit) above what I have into a project, ..........Im wasting my time.
I think you would do better at fixing it up, refinance - pocket 10k, and then rent or subto.
Good luck
Thanks for the response. I was using the example above but maybe should have used different numbers. If comps are $120k and you assume that the fixed-up price would also be $120k, and then you find that about $20k is needed to bring it up to comp value, what numbers would make it attractive to both me and the contractor I would sell it to in order to make it profitable for both of us?
Hey re_jon,
As NC_Yank said, He will not do a deal unless he gets at least a 30% return. I have been told, and I may be wrong, that most investors will not do a deal unless they get a 40% return. If you were to get a 40% return using your example, you would need to purchase the property for $60,714. Here's how it works out:
Projected selling price: 120000
Estimated closing costs: - (5000)
Renovation Expenses: - (20000)
Total: = 95000
X65%
Offer Amount = 60714
Offer Amount: 60714
Estimated Closing Costs: + 5000
Renovation Expenses: + 20000
Total cash Invested: = 85714
Projected Selling Price: 120000
Total Cash Invested - (85714)
Projected Net Profit = 34286
Projected Net Profit: 34286
Total Cash Invested: / 85714
Your Return on investment: = 40%
Hope this helps.
bchldres
Thanks! Using those figures, I think the light bulb went off. I appreciate your help.
re-jon,
I was reading your post and the responses and just thought I would give my 2 cents.
When we first started we wanted to do rehabs. We anylized everything that came to us and put so much thought into it I figured we would never get a property.
We had one offered to us, in a decent part of town. Was told it would sell for $160. I ran the comps myself (I'm also a Realtor) and could not see where they were coming up with those numbers, just no way possible. We passed on the house. However I tracked it. Guess what,
the guy who bought rehabbed it and sold it for $167 in 45 days from start to finish. He made $20K! we were sick!!
So we finally bought OUR first property, ran the comps, fast selling area, great price range, terrific location, so rehabbed the house and put it on the market. It took us 6 months to sell the damn thing and we netted nothing! We broke even. there was a $30K spread there and we only had to put $7K into the rehab. It was the time it took us to sell that cost us.
We were hoping to make $10K or even $5K, but that didn't happen.
We didn't quit, we tried again and this time we netted $12K.
It all depends on how much you know about rehabbing, holding costs etc. We now net between $10 to $20K per house thar we do, however WE do all the rehab ourselves. We do hire out the big stuff, roofs, major electrical and carpet. but we know ahead of time what the rehab is going to cost us and figure in a 6 month market time. If we sell in 2 months that's just more money in our pocket.
We don't use a formula, we work down from the purchase price. It just all depends on how much you know.
By the way, we have bought properties that only had a $20K spread and still made $10K after repairs and holdng costs.
Just my 2 cents,
happy investing.
Kristy-Az
I have started a rehab project. I had a contractor price out what it would cost to bring the property up to proper housing standards. The rehab cost of 51K. Owner asking 40K. I had it appraised at 110.5K. I got a construction loan for the 91K. I then finance the fourplex through normal banking loan at the end of the project. I got 100% financing. Out of pocket cost to me $435.00
My monthly payment on mortgage $675.00 with taxes, and insurance. Gross monthly rent $1400.00. Cashflow $725 per month. Plus 19.5K built in equity. No real maintenance fee because everything in new in the units.
This was my first project. If I can do this once every 6 months I would be too pleased.
The construction loan officer told me that there is more money for the next deal, lets get together and talk about it. My mind in already racing thinking about the project. I am a rookie to rehabbing. I hope this one deal does not spoil me.