LIFECYCLE OF A REAL ESTATE INVESTOR S RESIDENTIAL REHABILITATION PROJECT & CASE STUDY Presented by: Lisa Kennedy & Jon Kennedy, PSP AACE International Seattle Section November 9 th, 2017
DISCLAIMERS - This presentation is based on Jon & Lisa s journey so far. This is not intended to provide anyone else a road map. There is lot s of information out there and people should make their own path. - Taxes Ask your accountant! Note that not all accountants have the same skill sets within accounting and not all have the same interpretation on some topics. - It takes a team. There are lots of people and resources contributing to a successful residential real estate investor s rehabilitation project. Providing the proper recognition to those other team members would take a full presentation alone.
EVOLUTION OF A RESIDENTIAL REAL ESTATE INVESTOR
Interested party, bird-dog EVOLUTION OF A RESIDENTIAL REAL ESTATE INVESTOR
Wholesaler EVOLUTION OF A RESIDENTIAL REAL ESTATE INVESTOR
Flipper EVOLUTION OF A RESIDENTIAL REAL ESTATE INVESTOR
Rental Property Owner EVOLUTION OF A RESIDENTIAL REAL ESTATE INVESTOR
EVOLUTION OF A RESIDENTIAL REAL ESTATE INVESTOR Hard Money Lender
FINDING THE PROPERTY
After Repair Value (ARV) This is the price you will sell the home for after all the repairs, remodels, upgrades, etc. are made. You can get a good feel for it on your own after research, but your Realtor is the pro and should provide this to you. The ARV is the end number. From the ARV, subtract realtor fees to acquire the property, subtract realtor fees to sell the property after the repair, subtract excise and local taxes, subtract the cost of repairs, subtract the cost of money, and subtract the amount you would like to make on this property. The resultant number is your maximum offer value. Quick Estimate; Light, Medium, High, Super High Light Paint? Clean-Up? Medium New Windows? New Trim? Kitchen & Bathroom Upgrades? High New Kitchen/Bathroom; New Plumbing? New Electrical? New Roof? New Floors? Super High All of the above? Extensive Water Damage? Foundation Issues? New Septic or Well? FINDING THE PROPERTY
Work with Realtor, Bird-Dog, or Wholesaler to find properties making them aware that you are in the market for single-family residential properties. Keep the ARV in mind. If ARV doesn t work for a property, don t waste anymore time thinking about it, move on to the next one. What is the exit plan? If you find that the ARV isn t quite as high as you hoped, what are the rental rates in the area of the property. A plan B could be to keep the property and make it a rental, determine the cap rate and see if the return is worth it. Make Offers FINDING THE PROPERTY
Once your offer is accepted, you are on the clock. You must maximize your time to perform an inspection, bring all contractors you intended to use in to look, verify scope, and finalize your pricing. Take all measurements to get accurate information to the applicable vendors. Inform you lenders of your offer s acceptance. Make sure they have funding available. As the timeline comes to a close on the inspection period, review your numbers to make sure your offer value to ARV will still work. If they don t work, revise your offer and be prepared to back-out of the deal. DO NOT GET EMOTIONALLY ATTACHED TO THE HOUSE/PROJECT. If the numbers don t work, they simply don t work, and you need to be prepared to walk away from this deal and look for your next one. FINDING THE PROPERTY
Common Examples Final Sell Price - Cost of Property - Cost of Repairs = Profit This works if you don t need to pay Realtor fees and you don t need financing. Real Life Final Sell Price - Cost of Property - Cost of Repairs - Cost of Money - Cost of Realtor Fees (purchase & sale) - Cost of Taxes = Profit COMPARISON
CASE STUDY: Before: Taken from corner of street, looking at front entrance.
CASE STUDY: Before: Living Room, taken from kitchen area looking out towards front windows/door
CASE STUDY: Before: Kitchen Electric oven to the left. Abandoned in place water heater in cabinet below and to the left of the sink.
CASE STUDY: Before: Bathroom One feature is that you could watch your carport while showering.
CASE STUDY: Before: Back Bedroom
CASE STUDY: Attraction: View of Mount Baker
CASE STUDY: Attraction: View of Cherry Point, Birch Bay, and Islands
Initial Math: ARV, provided by Realtor, $230k -9% for Realtor Fees (both sides) & WA State Excise Tax, $20,700 -> $209,300 Estimated Repairs, -$25k -> $184,300 Cost of Money, -$5k -> $179,300 Desired Profit, $15k -> $159,300 Initial Offer -> $159,300, Accepted Inspection led to additional costs with contractors, $5,800 Acquired Property for $153,500 CASE STUDY: Single Family Home: Included 2 Bedrooms, 1 Bathroom, 1 Utility Room, Enclosed Carport, and Detached Shed Listed for $175k Ocean & Mountain Views ~1000 SFT Large Corner Lot Community of nice people Lots of Layout Potential
CASE STUDY: During: Pulled Carpets, found carpet pad on top of laminate flooring. Pulled Trim; wall panel themed wall paper was painted over. Demolished kitchen partition wall and removed refrigerator, removed existing window, relocated door.
CASE STUDY: During: Pulled Carpets, found carpet pad on top of linoleum flooring (80s) and yet another level of linoleum (60s). Pulled Trim; wall panel themed wall paper was painted over. Demolished kitchen partition wall and removed refrigerator, removed existing window, relocated door.
CASE STUDY: During: Kitchen was adjacent to the bathroom. Closed in the back window New shower/tub installed in same place as previous.
CASE STUDY: During: Rough-In of the new larger and much more modern windows. View of Bay and Islands from front bedroom. Kept existing carpets in bedrooms.
CASE STUDY: After: New cabinets, appliances, wall tile in kitchen area, lighting, laminate flooring, small slider. New windows throughout. New trim throughout.
CASE STUDY: After: New vinyl tile flooring, bath/tub, new vanity, new lighting, new toilet, new fan.
CASE STUDY: After: New windows, paint, air conditioner, front door, lattice work on the deck, exterior light fixture, and new color scheme.
Initial ARV, provided by Realtor, $230k Acquired Property for $153,500 Repairs/Rehab $36,000 (budget $30.8k) Cost of Money $8,500 (budget $5k) Subtotal $198,000 Approximate 5% for Realtor Fees (sell side) & WA State Excise Tax, $14,400 Subtotal $212,400 Listed Property $245,000; offer $240,000 Potential Profit $27,000 (Desired Profit at offer was $15k) CASE STUDY: Listed property for $15k more than ARV, offer fell through.
CASE STUDY: Pulled it off the market and instead it became a rental property. Initial ARV, provided by Realtor, $230,000 Refinanced, appraisal came in at $228,000 Plan B in place as a cash flowing rental property.