House #2: Going to Closing

August 18, 2008 · 0 comments

I mentioned earlier that House #2 had some potential water damage, and that the due diligence indicated a few more problems than I had expected. Based on those things, I went back to the bank (the seller) before my due diligence period ended, and asked for a $5K reduction in price. They countered my $5K drop in price with a $2500 reduction — with my choice of price drop or cash-back (paid towards repairs) at closing. I accepted the offer, and opted for the $2500 cash at closing to go towards repairs…we’re going to closing on this one!

With my due diligence period almost over, I ran the numbers one last time the other day, and this is what I came up with…

My budget for this one (as a rental) is $14,000 ($11,500 plus the closing credit), so with the $61K purchase price, my all-in cost will be $75,000 plus closing/financing costs.

I plan to do the following work:

  • Replace the roof
  • Repair/replace cracked rafter in attic
  • Repair soffit/fascia/trim damage from leaking roof
  • Replace A/C
  • Replace Furnace
  • Replace Water Heater
  • Replace fridge/dishwasher
  • Get an exterminator in to seal up openings
  • Minor plumbing repairs
  • Steam clean rugs
  • Deep clean house
  • Paint interior

I have a bid on the roof, rafter and soffit repair for $5K. I have a bid on the A/C, Furnace, and Water Heater replacement for $5K. I have a bid on the painting for $1500. The appliances will cost less than $1000. The exterminator will be less than $500, the plumbing repairs will be less than $500 (hoping to get that thrown in with the HVAC work). That leaves me about $500-1000 worth of wiggle room for anything unexpected, though this place is in really good shape once the mechanical stuff is replaced.

As for rental comps, it should be pretty easy to get $800/month, and I’m hoping for closer to $850. While I like to use the 50% rule for expenses, with all new mechanical systems, new appliances, and new roof, my expenses for the first several years should be well below 50%, and if I can keep them at 44% or below, I can cash flow with 100% of my money pulled out (and self-managing it). With a 10% down-payment left in there, and not refinancing out my rehab costs, it actually cash-flows pretty well, and my return is close to 9-10% on the investment.

When I go to sell, I’ll want to add about $10K more work:

  • Exterior Painting
  • New Microwave/Washer/Dryer/Stove
  • New Windows
  • New Doors
  • Repair the “bulge”
  • Fix up the garage conversion room (sheetrock, flooring, etc)

This will take my basis to about $85K, and comps in the area would indicate that the place is worth $120K-$130K (though I don’t think it will sell quickly in this market, so I’ll have to wait at least a year or two, and may wait much longer). So, I should make $25K-35K after all commissions, and maybe more since my wife will be the agent for the sale.

Not a home-run, but certainly a decent deal…and the work on this one is *easy* compared to some of the others…

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