As I’ve mentioned, this is the first of three properties we’ve purchased in this subdivision. All three were purchased between $55-60K, needed between $13-20K in rehab, and are being resold in the $100K range. While we could likely get a good bit more for these properties, there aren’t too many comps in the area (other than the ones we’re creating), so we’re selling low, making a quick minimum profit, and giving our buyers a great deal.

This property was only on the market for two days before we got our first offer. In fact, we never even finished staging the property before we came to terms with the buyers!

Here are our final analysis numbers:

Timelines

The rehab and sale were both very short on this deal. The longest parts of the project were the two and a half weeks we waited to put in on the market (we finished rehab just before Christmas) and the 7 weeks we waited to get the deal closed after the contract was signed (this was a request by the buyer).

Here are the key timeline milestones:

• Purchase Offer Date: 11/8/2010
• Purchase Closing Date: 11/29/2010
• Rehab Completion Date: 12/13/2010
• Sale Listing Date: 1/1/2011
• First Sale Contract Date: 1/3/2010
• Final Sale Contract Date: 1/3/2010
• Sale Closing Date: 2/23/2011

Financials

Here is the breakdown of financials for this project:

We will clear almost exactly $15K on this project (after including unpaid utility bills we’re waiting to receive), which is our minimum profit target. Our ROI on this project was about 100% (we put in very little of our own cash on this project) and our annualized ROI was just over 400%.

Final Statistics

Here are just some of the final statistics that I’ve been tracking for all my projects, and that summarize the success/failure of each project pretty well:

• From Offer to Purchase Time: 21 Days
• Rehab Time: 13 Days
• Selling Days on Market: 2 Days
• Selling Close Time: 51 Days
• Total Hold Time (Close to Close): 86 Days
• Total Profit: $15,295.85
• Return on Investment (ROI): 97.76%
• Annualized ROI: 414.91%

Here’s the preliminary budget that I’ve put together:

This first two sections of the budget include all the interior and exterior work that we know we need to do (total of $13,000). The third section includes the items that may be necessary, depending on our inspections and rehab decisions (another $7000). So, while we’re going to attempt to keep this one around $13K, it could be as high as $19,500 (if we do the roof and cabinet replacements, we’ll save $500 on cabinet painting and roof maintenance).

We expect this rehab to take less than a week, and hopefully there won’t be any surprises…

Here’s the preliminary budget that I’ve put together:

The goal is to keep this one below $12,500, which seems reasonable assuming there are no surprises. Unfortunately, it’s these small rehabs that tend to have the most surprises, and even small overages can blow the small budget.

We’ve already had one little set-back — it appears another investor was in the house after we put it under contract, and he busted a hole in the good parquet floor. I’m guessing he was (incorrectly) doing a termite check, and the busted floor was an accident. Regardless, we’ll now need to get the floor fixed. Luckily, our hardwood guy thinks he can match it and repair it pretty easily.

We’re scheduled to close on the purchase of this property tomorrow, so for the past week or so, there’s been a big push to get final bids and contracts signed with our contractors. For the most part, we’re pretty close, but given the complexity of this project (with the recent flooding, there have been changes to the building codes for these types of houses) and the unknowns (we can’t get even get the electricity on until the house is rewired), it’s possible we’re going to miss some things in our planning.

Our goal for this budget was $34,500, and after getting most of our bids — and estimating the remaining items that can’t yet be bid — it turns out we’re under that target by a few hundred dollars:

Of course, I expect at least a few little surprises on this project, so I wouldn’t be too surprised if the number goes up a little bit. If we find that we’re still on budget towards the end of the project, we may opt to put hardwood floors in the main living areas (living room, dining room, kitchen), though this would likely add another $2000 or so to the budget. We’ll make that decision when we have a better idea of where our budget will ultimately come in.

In my next post, I overview our schedule for this project, and hopefully I’ll be able to tell you that we’ve closed on the purchase and started the rehab…

If you recall The Flip Formula that I often refer to, the formula for determining estimated profits on a flip would be (assuming I rearrange the formula correctly):

Profit = Sales Price – Purchase Price – Fixed Costs – Rehab Costs

We estimate that we should be able to sell this property for between $75,000 – $80,000.

Our Purchase Price on this property is $43,500.

Our Rehab Costs are estimated at $6,500.

Our Fixed Costs are along the lines of the following:

Our profit on a $75,000 sale would be:

Profit = $75,000 – $43,500 – $8,500 – $6,500 = $16,500

And our profit on an $80,000 sale would be:

Profit = $80,000 – $43,500 – $8,500 – $6,500 = $21,500

So, we could realistically expect profits in the $16-22K range…

That’s pretty much what we’d expect from a property that requires very little work (about 3 days of rehab). If we could generate greater profits than that, it would probably be a slam dunk flip. And if we couldn’t even generate that minimum profit, it would probably be a slam dunk rental. But, with profits in that range, it’s actually a difficult decision…

I’ll post some additional financial analysis in an upcoming post that will hopefully give a better perspective on flip vs rental, given the numbers we have so far…

(Note: If you only care about the numbers, feel free to scroll down to the spreadsheet further down this post.)

First, let me review the financial details of the purchase and rehab of this project (for a full tutorial on financial analysis, check out this article):

• Purchase Price: $43,500
• Closing Costs: $2,000 (only incurred at time of refinance)
• Rehab Costs: $6,500
• Financing: 65% LTV, 7.0% Interest, 15 Year Amortization, 3 Year Balloon

The total cost of the purchase and rehab will be $50,000, and once the rehab is complete, I will do a refinance with the terms above. I will refinance 65% of the $50,000 investment, to take a total cash-out of $32,500. My remaining out-of-pocket investment will be $17,500, with another $2,500 in closing costs.

So, my total out-of-pocket cash investment will be right about $20,000.

My monthly income and expenses should break down as follows:

• Income / Rental Rate: $900/month (estimated)
• Vacancy: 8.3% (1 month per year)
• Property Taxes: $1400/year ($116/month)
• Insurance: $400/year ($33/month)
• Maintenance: $900/year ($75/month)
• Property Management: $1200/year ($100/month)
• Mortgage Payments: $292/month

A couple notes about the items above:

• $900/month in rental income is estimated. Realistically, it could be anywhere from $850-950, or even up to $1050 if I rented to Section 8 tenants.
• I haven’t budgeted for capital expenditures (like new roof, new HVAC, new water heater, etc) because the house is only 6 years old, and because I don’t plan to hold it for more than 3-5 years. So, no capital expenditures should be required before I sell.
• We will be doing property management in-house. I will be paying $100/month for one of my employees to manage the property.
• I’ve talked previously about the 50% Rule — that on average, a good rule of thumb is that total expenses plus vacancy will be around 50% of income. In this case, expenses are about 44% of income, which given that our capital expenditures should be low, given it’s a relatively new property and given that we’re doing our own property management, seems about right.

Based on the numbers above, our analysis breaks down as follows:

Ultimately, we’ll see cash flow of about $200/month, our cash-on-cash return will be somewhere around 12.5% and our total return will be about 19%.

While these numbers are decent, they’re not spectacular. But, I believe the real potential of this property is in the short-term appreciation. Because this property is located near last year’s major flooding (estimated at a 1 in 500 year flood), there is a stigma associated with the area and it’s difficult to find buyers interested in the location. But, I think that will change once the memory of the flooding fades and people are more willing to purchase in this part of the city.

After rehab, I have a feeling ARV will be somewhere in the $75K range; but in 3-5 years, ARV could potentially be closer to $120K. Of course, if we don’t see the appreciation we’re hoping for, the property still cash-flows nicely, and we’ll still be making money holding it as a rental.

Introduction to Internal Rate of Return (IRR)

Every investor — regardless of what they invest in — needs to understand how to calculate their success or failure (hopefully success!) for each individual investment and for their entire portfolio. And no, simple ROI calculations rarely give an accurate assessment of your investment return.

So, take a look at the article, and if you have any questions or want more information, let me know…financial analysis is an important topic that I’m always happy to write about!

Results To Date

For a large rehab, this project was pretty textbook; we completely replaced the exterior (new roof, gutters, siding, trim, soffit, fascia, decks, etc), remediated a good bit of mold, waterproofed the foundation, finished the basement, and did a full cosmetic rehab on the rest of the interior — all in about 7 weeks. Had we not gotten so much rain at the beginning of the project, it likely would have been finished in under 6 weeks, which is pretty amazing for a gut rehab like this.

I don’t think I ever nailed down a specific budget on this one here on the blog (other than saying “between $45-55K”), but we came in right about where I expected after adding a few upgrades (large front and back decks, basement closet, new windows) that I hadn’t planned. In total, we spent just over $53K, with $45K going to labor and $8K going to materials.

As I’ve mentioned before, I’m thrilled with how this house turned out. It’s not surprising that we received a quick full-price offer after we put it on the market, and it’s not surprising that we received another near-full-price offer shortly after the first contract fell through. This second buyer (and agent) was a pleasure to work with, as the entire process went smoothly and stayed on track from beginning to end.

We almost had some appraisal issues down the stretch, but the mortgage broker did her job well, and we closed on schedule. Here are more detailed breakdowns of our final schedules and financial results…

Timelines

The total holding time on this house was 172 days. It would have been exactly 100 days had the original contract gone through, but considering we essentially completed two separate sales, I guess this isn’t too bad (okay, perhaps I’m rationalizing a bit ).

Here are the key timeline milestones:

• Purchase Offer Date: 8/25/2009
• Purchase Closing Date: 9/24/2009
• Rehab Completion Date: 11/18/2009
• Sale Listing Date: 11/23/2009
• First Sale Contract Date: 12/8/2009
• Final Sale Contract Date: 2/15/2010
• Sale Closing Date: 3/15/2010

The final contract closed in exactly 4 weeks, which isn’t too bad given it was an FHA buyer.

Financials

This was a pretty textbook rehab for us in terms of financial forecasts and results. We were right on track with our projected budget, and our sale price was right about where we expected it to be. At the beginning of the project, I was expecting a $30K profit if everything went as planned, and we exceeded that by just a bit.

Here is the breakdown of financials for this project:

There will be a few more small transactions before the numbers are finalized — insurance overpayment refund, final utility bills, etc — but I expect that we’ll be within $100 one way or the other of this final profit amount.

Our ROI on this project was 105% (we invested just under $30K of our own cash in the deal), and our annualized ROI was about 224%. Not bad, even considering our relatively long hold-time.

Final Statistics

Here are just some of the final statistics that I’ve been tracking for all my projects, and that summarize the success/failure of each project pretty well:

• From Offer to Purchase Time: 30 Days
• Rehab Time: 54 Days
• Selling Days on Market: 84 Days
• Selling Close Time: 28 Days
• Total Hold Time (Close to Close): 172 Days
• Total Profit: $31,617.52
• Return on Investment (ROI): 105.83%
• Annualized ROI: 224.59%

I’d like to say this was a fun project, but after dealing with four different buyers over the past six months, I’m pretty sick of having to deal with or think about this house.

I take full responsibility for this one not closing back in September — had I attended the appraisal for the first contract we had, I most likely could have gotten the appraisal value to the $85K range, as opposed to $65K, which sunk the deal. While it was unlikely we could have ever gotten an appraisal for the original offer price ($99,000), we have since gotten three appraisals in the $85-88K range, and we would have been happy to take that price several months ago.

Also, the appraisals on this property have been much harder since September, when major flooding hit the area, and essentially wiped out 90% of the homes in this subdivision. We were lucky that our survived completely intact, and that future potential buyers weren’t put off by the neighborhood damage.

Here are all the relevant statistics and financial breakdown for this one…

Timelines

The total holding time on this house was a crazy 220 days. It was the second-longest it’s taken us to sell a house, and again made even more disappointing by the fact that we should have been able to sell it at around the 100-day mark.

Here are the key timeline milestones:

• Purchase Offer Date: 5/29/2009
• Purchase Closing Date: 6/30/2009
• Rehab Completion Date: 7/20/2009
• Sale Listing Date: 7/21/2009
• First Sale Contract Date: 8/10/2009
• Final Sale Contract Date: 1/21/2010
• Sale Closing Date: 2/5/2010

The bright side of this whole deal was that the closing time for the contract that finally went through was only 15 days…and this was an FHA buyer! I wish all our buyers could close that quickly…

Financials

From the beginning, we had expected this to be a minor rehab, and were hoping to make a quick $15K return. In the end, it was a minor rehab. But that’s where our correct assumptions ended. We didn’t make our $15K return (only about $12,600). And, there was nothing quick about the sale process. In fact, we were fixing minor issues (like a broken thermostat) up until the past 48 hours.

Here is the breakdown of financials for this project:

There will be a few more small transactions before the numbers are finalized — insurance overpayment refund, final utility bills, etc — but I expect that we’ll be within $100 one way or the other of this final profit amount.

Our ROI on this project was 82% (we only invested about $15K of our own cash in the deal), and our annualized ROI was about 136%. Not bad, even for the long hold-time we’ve had.

Final Statistics

Here are just some of the final statistics that I’ve been tracking for all my projects, and that summarize the success/failure of each project pretty well:

• From Offer to Purchase Time: 32 Days
• Rehab Time: 20 Days
• Selling Days on Market: 184 Days
• Selling Close Time: 15 Days
• Total Hold Time (Close to Close): 220 Days
• Total Profit: $12,604.96
• Return on Investment (ROI): 82.20%
• Annualized ROI: 136.37%