Strategy on Offer #2

Yesterday, I mentioned putting in an offer on another investment property. Some people have asked me what I’d do with this property if I get it. The nice thing about this one is that I believe it has multiple good exit strategies…here are some more details…

The house is an REO (bank-owned foreclosure) listed at $61,900. I had a GC come by on Sunday, and estimate the rental rehab costs at about $10K-11K, and about 2-3 weeks of work. Rehab to sell would likely be $5K-15K more, depending on how nice we would make it, and would probably add another week to the effort.

The comps (what other similar properties in this neighborhood are selling for) are in the $120K-130K range, but a lot of similar houses that are currently on the market are rehabs, just like this one would be. Rent comps are $900-1000, and my agent thinks I could probably get Section 8 tenants in there for $950.

I put in an offer at $56,000, and my potential exit strategies are as follows:

1. Rent It. If I can get the property for $60K and put $13K of work into it, my basis is $73K. With a 30-year fixed loan at 7.5%, I can take refi all my investment back out and cash flow with 50% expenses and $900/month in rent, assuming I do all management. This is very conservative, and with lower expenses, higher rent, and leaving any part of my investment in, I should be able to generate very decent cash flow. I could later do some additional rehab, and when the market rebounds, could likely sell for at least $130K.

2. Sell It. If I can get the property for $60K and put $25K-30K of work into it, my basis is $90K on the high side. I could probably sell quickly at $115K, and make a quick $25K-30K.

3. Try to Sell It, Rent as Backup. Another option is to keep my options open. If I can get the property for $60K and put $22K of work into, my basis is $82K. If I could sell it for $110K, I could make $28K profit, but if it turns out I can’t sell it, I could still cash flow it as a rental with about $7K of my own money left in the property. This way I wouldn’t be spending so much money on the rehab to kill my chances of renting if I can’t sell, but I can make the property nicer than a rental and hopefully attract a buyer looking for a cheaper house.

Not sure what I think of Option #3. This is a “hedge my bet” option that would force me to create something that’s better than a rental but not a “best in show” house that I’d want to sell? Will have to think about this option some more.

Will hopefully have an update on this one soon…