I'm looking at a dated property, 1970's, that looks like most everything inside of the unit is original to construction. It's in a class b- O/O neighborhood and a generally quiet area.

The comps for renovated properties in the neighborhood are $150-165k and this property's asking price is $100k. I'm estimating about $30-$35k worth of renovations to bring it up to the area standards. At that point, I'll be able to rent it for $1300, which would be 1% of my out of pocket all-in expense, leaving me with a ballpark of $20k in equity.

My question is this: When you all buy properties, what discount/instant equity are you looking for when compared against the comps? In a neighborhood where 3/2 properties are selling for $150-$165, what would your maximum all-in be?

I've read that some of you all won't even look at a deal unless they can get 2% of their all in expenses per month. In my area, those deals don't exist with SFH's unless I want to invest in Section 8 class properties.

Given the numbers above, how would you feel about moving forward with the property?

Some things to consider with an early 70s house:

1. Aluminum wiring.

2. No electrical disconnect at service entrance.

3. Lead paint.

4. Asbestos in popcorn ceilings and exterior wall shingles

5. Worn out systems: waste plumbing, supply plumbing, etc.

6. Out of date everything: kitchen, lighting, bathrooms, doorknobs, cabinets, fixtures...the list goes on and on.

I just completed a 1972 renovation. Ran into most everything on this list, plus a few others. Ended up spending over budget to correct everything.

That's a primary residence, not a rental. Shave 10-15% off your guess of after rehab value and add 20% to your rehab costs.

that house you are talking about is exactly what I am buying. It works for me. I don't find 50K houses in my area. either buying at a slight discount and minimal repairs or a deeper discount with 20-30K repairs and then rent for 1100 to 1300 which is about 1% of the house value. I am mainly looking at 3/2 ranches from the 60s. Basic starter homes. My main concerns are the roof, the HVAC, the plumbing, the electric, windows and the hot water heater. Keep it simple, fix what needs to be fixed and get it rented.

My mental math to figure out my offer price involves these number to fix it. Maybe it costs this much and maybe it doesn't.

roof - 7K (single story with car port)

HVAC - 5K

plumbing - 2K

electric - 3K

Windows - $300 a window double hung vinyl replacement windows

HWH - 1K

paint 2K

flooring $3 a sq foot installed

Others have different business models. This works in my area. I only attract top end renters who seem to take care of the property.

No I am not making a killing on the buy side but I figure if I hold for 30 years it really doesn't matter if I paid $100K or $130K.

For me it is about the cash flow for all those years, the depreciation for all those years, and the ability to sell a SFH that every starter family wants.

What would it cost you to either:

1) Buy an existing lot and install a modular home of the same size?

2) Buy a trashed older place, demo it and replace with a modular?

As an example, I'm looking at a 1940 home on 2/3 acre that's trashed. However water, sewer, gas and electric are there. Pad will need to be reworked to fit a modular.

Good used (repo) modular can be had for 20K with 4K setup and maybe another 10K in utility relocation for hookups. So about 34K plus buying the lot cost (12K) and demo (4K). About 50K total. Rent at about 2%. Or just flip it.

Great question!

Here is my criteria for long term holds.

Must have a minimum 20% equity position after all repairs.

Must cash flow $250/mo minimum with a 10yr note.

Stable or increasing neighborhood. No declining areas or war zones.

ROI depends on if I am getting good appreciation or fast paydown.

I want a minimum of 6% return on CASH invested.

A few questions/thoughts, some of which may just be clarification from you.

1) Donated time. Are you hiring all the work done, subbing it out and overseeing the work, subbing out some and doing some yourself, or doing everything yourself?

Sid's thought: Many "investors" I know are buying themselves handyman/contractor jobs, and their "profits" come at the opportunity cost of days, nights, and weekends away from family and friends. We should always "pay" ourselves if we do anything more than write up a work order, send it to a contractor, and forget about it. Our time is worth something, and so as investors we should insist on calculating that into the overall return.

2) Renovations estimate. Are you including Holding Costs? How much for contingency/cost overruns/delays?

Sid's thought: I estimate the repairs, including the standard 10% for "unplanned events"....then usually add 10% more. Why? Because on my first 3 rehabs I end up over budget. The leak that wasn't detected at closing. The goofballs who steal supplies. The time delays as bad weather prevents certain parts of progress (roofs!). I had a house that NEEDED a new roof (as in, the ceiling in the living room was leaking actively)....got my bid, scheduled the work...then it rained for 10 weeks. Ended up replacing the entire ceiling as well as the roof. Lesson learned: blue tarps and 1x2s on leaky roofs, even if the work is suppose to start "next week". (*grins)

3) ROI. I'll assume for know that your figures are accurate and you're 100% hiring out the work, including a GC to manage the project and have adequately allowed for holding costs and contingency. That leaves you with $20K "real" equity if you decided to turn around and list it with a Realtor the day after it's done. $20K / $135K "all in" = 14.8% profit.

4) Last question....Does 14.8% satisfy you?

Sid's thought: To evaluate an investment, I've learned to ask "As compared to what?" There's nothing WRONG with this approach of buying and fixing houses, even if you donate all the time and effort yourself or do some and hire some. But if we use the "as compared to what?" thought process, then to evaluate the return on this deal fairly we have to consider what if you just parked the money in an S&P index fund and picked up checks from the mail box?

What am I doing these days? I'm one of those "unicorn" hunters who goes after the 2% rule. Recently, it's been a little harder and I've started to look at 1.7-1.9% as well, if I anticipate the rents will grow into the 2% category with minor repairs/upgrades and 1-2 year's time. I'm looking for rents in the 2% range and around 24% ROI. If those kinds of deals aren't available in your area, consider looking further out or perhaps for something with less risk.

B- hoods generally do not have as high of a cash on cash return vs. C. Supposedly, they are less management intensive and appreciate better than C. I can't say since I've never owned any "B" property. However, I find that properly screened C tenants do not require much effort. As far as appreciation: that's nice icing on the cake, but B neighborhoods can also go DOWN in value sometimes when the economy stalls or when more renters start to move in. C hoods stay relatively flat and/or climb with the rate of inflation, and in that way they represent something of a "floor" to any possible equity losses.

If returns are not acceptable, it may be best for now to optimize the assets we have and sell a few, and be prepared to buy on the dip.

In the end, we have to decide what we're willing to tolerate and what reward we expect. I hope this has been useful for you. I find the subject endlessly fascinating!

Happy hunting!

hammer, a point of clarification: The 1% rule doesn't mean you're making 1% on your money. It means you rent out the unit for 1% of the total "all in" cost. So a house for $100,000 would rent for $1000/month.

If you buy for cash and half of rent goes out the door for all expenses, then at a $500/month profit you'd be making 7.2% on your money. Make sense?

I'm a 2% rule investor. My $30,000 "all in" house needs to rent for $600 or very close to it.

I agree with gevans....as a home inspector I saw all those things. I recommend having an inspection to uncover these issues.

The good news is that many improvements were made right around that timeframe. Breaker panels were introduced, romex wiring, PVC drains and copper/CPVC supply lines, vinyl siding, and much much more. Also, we learned that building houses on flat lots was not such a good idea...so most builders started "grading" yards around that time so that water flows away from the house...minimizing basement/crawlspace water issues.

SIdmo,

Thanks for the clarification. Im brain dead today after the Mr.LL conference. LONG travel day home yesterday.

My issue with the 1% rule is that it doesn't take into account: expenses, NET profits, or opportunity cost. I own 2 homes for the same price with the same rents. The one in the county is 100% fixed up (low maint.costs) and taxes are half. The one in the city is in good rentable condition, but it will require more repairs and taxes are Double what they are in the county. So the house in the county is much more profitable and has better cashflow than the one in the city even though my "all in" is the same, and rents are the same.

Both follow the 1% rule but the county property is more profitable with better cashflow.

hammer, indeed, you are correct!

As always with any "rule", keep in mind the 1% Rule is just a "first glance" number. It's the first round cut among several rounds of cuts designed to make me more efficient by weeding out properties that won't fit my criteria. It's not an automatic pass to the next round.

Sidmo,

Yep. Unfortunately I see investors buying based on the 1% rule without really understanding the rest. Some of them have been in the business for years and should know better. We get beat out at auctions all the time by LL's who use the 1% rule to determine what they will pay for the property.

A lot just depends on where you are located.

My last SFH purchase is running 2.7% so easily beating the "2% rule". SFH that I will be closing on in a couple weeks will be a little above 2.5% also. Can't always find these deals but when they pop up I make sure to jump on them.