True Costs of D.I.Y. Acquisitions
- January 30, 2017
Imagine two houses on the same tree-lined suburban street. Both were built within the last 20 years, both have three bedrooms, two bathrooms, and yards large enough for a couple of kids to play. House number one, is purchased by a new, starry-eyed investor. He did a walk through, took a few measurements, read the reports and determined that the house only needed fresh paint and new carpet. He based his bid on the minimal rehab costs. The house is in a good neighborhood. It will be rented or sold within a week!
Mr. Experienced Investor saw house number one, tallied up the total rehab and acquisition costs and passed. He purchased house number two. Paint and carpet would spruce up the place, but Mr. Experienced investor had learned the hard way to take the long view. If he was planning to hold the property, he didn't want to have to pay for broken furnace or leaky faucet repair out of his rental income. If he was planning on a flip, he didn't want to be stuck with repair costs after the inspection report highlighted any flaws.
Mr. Experienced also wanted to sell quickly at a profit or attract stable renters for his long term hold renters who were at the high end of the rent scale for the neighborhood. In addition to paint and carpet, he replaced the appliances, refinished the cabinets and counters to make the kitchen sparkle, installed an automatic sprinkler system in the newly sodded lawn, and made other significant and lasting repairs.
The careful reader will guess how this story ends. When potential buyeres entered the staged home placed on the market by Mr. Experienced, they were dazzled. Mr. Starry-eye's paint-n-carpet rehab didn't stand a chance. Worse, Mr. Starry-eye had blown his rehab budget when, during carpet removal, dry-rot was discovered. And that new paint job? Stained by a leaking roof. By underestimating rehab costs, he lost is shirt on his "great deal."
The only shortcut to becoming Mr. Experienced is to put him on your team. Knowing how to account for all of the acquisition and rehab costs and calculate true CCR (Cash on Cash Return) will help the willing investor make better purchase decisions. (We're already convinced that low quality leads to low results, correct?)
When one calculates or projects CCR , one has to include ALL of the costs to the point of sale or of the initial rent check. While the fantasy in the heat of pursuit of a deal is that the cost is the purchase price plus carpet and paint, out-of-pocket expenses are always far greater. One has to add the total cost of purchase, complete rehab, along with the surprises, and the total cost of carrying the property (PITI, utilities, ads, lease-up fee, etc.) until the money clears the bank and the property is occupied.We all like to boast about the great deals we get. The problem is not the rosy picture we paint for our doubting friends and family, but the story that we WANT to believe ourselves. Do your homework, do your due diligence, and be truthful with yourself while you can still cut your losses and move on to a better investment.
We all like to boast about the great deals we get. The problem is not the rosy picture we paint for our doubting friends and family, but the story that we WANT to believe ourselves. Do your homework, do your due diligence, and be truthful with yourself while you can still cut your losses and move on to a better investment.
The Wilson Investment Properties quality turnkey business model is no secret. We share our process and our results openly. In over 260 properties that we have provided to investors and homeowners, only four required just paint and carpet. Could we have gotten away with that little on a few more properties? Maybe. But experience has taught us that, when flipping, a quality rehab commands the highest price and spends little time on sitting on the market. For maximum long term cash flow ROI when holding a property, high-quality rehabs attract the best tenant at the best rent and cost less out-of-pocket to maintain.
Two tables accompany this article. One lists the typical rehab cost items, the other provides a model for estimating typical investor property acquisition costs. When performing a CCR analysis for a potential investment, this level of detail and total costs is critical in making a good investment decision.
To be successful with either a buy-and-hold or fix-and-flip investment strategy, understanding the numbers is only one half of the equation. The other half is follow-through. Investors, inexperienced with rehabs, soon learn the challenge of selecting and managing contractors, choosing materials and supplies, participating in the permit process, and forging a relationship with an attentive property manager or real estate agent, all while keeping an eye on the bottom line. To take a property from purchase to the point of cash flow poses a serious challenge. It is hard to do better than someone with experience and the cash and proven resources to do it right.
My take on the fix-and-flip versus buy-and-hold investment strategies? For the least risk and greatest long-term reward, I say forget "Do It Yourself" acquisitions. Instead either invest funds with an experienced flipper for a solid return on your investment, or buy quality rehabbed, fully-rented properties and then hold 'em.
- Typical Rehab Cost Items
- Air conditioning system
- Appliance repair
- Appliance replacements
- Bath repairs
- Cabinets refinishing
- Carpet replacement
- Cleaning, final
- Electric fixtures and fans
- Electrical repairs
- Exterior paint
- Exterior repairs
- Garage door opener
- Heating system
- Interior paint
- Interior repairs, general
- Kitchen counter rehab
- Kitchen repairs
- Landscape clean up
- Landscape improvement
- Plumbing fixtures
- Plumbing repairs
- Roof repairs
- Sheetrock repair
- Trash out
- Vinyl/tile flooring
- Water damage
- Window blinds
- Window repair
- Window replacement
|Typical Property Acquisition & Rehab Costs|
|From Purchase Until Leased|
|Debt Service Loan||$1,570|
|Total Average Additional Out of Pocket||$16,010|
|Percent of Purchase Price||17%|
|Total Out of Pocket Cost with 20% Down Payment||$34,810|
|Average Days Purchase to Lease||90 days|
|Initial Rehab Estimate||$3,500|
|Initial Rent Ratio Estimate||1.18|
|Rent Ratio after Rehab and Lease||.99|
|Total Acquisition Cost||$110,010|
*Add debt service for down payment and rehab funds if those are borrowed.