Value Add with Capital Out
Single-family residence buy & hold investment.
Purchase price: $102,000
Cash invested: $100,000
After our first project, we decided that we could take on a little more. We found this project in the weeds in MLS, at the time there was a lot of properties on the MLS in 2010. This project was another one that was permitted, but the builder walked away from the project. This house was relocated to it's current location in 1930 or 40. The person had already completely dug out the entire basement to head height.
What made you interested in investing in this type of deal?
We were young, new investors that had the world in front of us. But for real, we probably got the deal because we were willing to put in the work that needed to do this project. We put in as much capital as it cost for the land and it took a lot of hours of our time to get this completed. We still own it today and are about to refinance it to take out more money to invest in additional projects.
How did you find this deal and how did you negotiate it?
MLS - Negotiated with the bank who had taken it back from a builder. Not in livable condition, so we negotiated a lot off. I think 40%. Open permits, a real isor.
How did you finance this deal?
Bank of Dad. I know we say this a lot, but the money was cheaper than hard money and it was available. Throughout all of these deals, we have always paid him back in full at the end of the project. We have always financed our own construction.
How did you add value to the deal?
Finished a basement that did not have a slab done when we got it. We had to put in rough in plumbing and pour the slab and retaining wall. We also had to finish the open permits.
What was the outcome?
We finished the project and refinanced. The value in 2010 came out to be 325k which provided us with 225k cash. The bank literally paid us 25k to do the project. The cashflow when we did this was not incredible, but broke even. Having 25k on a 30 year mortgage was more valuable to us at the time than making $100 or $200 more a month. We knew we were going to hold on to it for a long time.
Lessons learned? Challenges?
Taking on a lot of work in a project can be a lot of value, but there are a lot of opportunities for things to go wrong. The more that needs to be done, the more attention that needs to be paid to the project. Anything involving permits is also very challenging, even for us today.
Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?
Mike Maier with Fairway mortgage at the time worked with Guild Mortgage.