The House is Ready to Go on the Market!

I’m coming off another jam-packed weekend of 12-hour days fixing up our foreclosure house. Between our weekend warrior efforts and the nearly $5,000 we’ve paid towards labor costs, this fixer-upper is ready to go on the rental market!

Want proof? You’ve seen the “before” video (if you haven’t, click here.) Check out these “after” pictures:
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cashflow positive rental property
foreclosure home investing
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foreclosure property investing
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Haha - There's me taking pics of the house.


(Click “display images” to see the photos if you’re reading this by email.)

So how much did it cost us to convert an ugly duckling into a beautiful swan?

House: $21,000 *
Labor: $4,661.73 **
Materials: $3,576.98
Total Repairs (Labor + Material) = $8,238.71

Total = $29,238.71

* we also paid a couple hundred bucks for closing costs

** carpet and garage door (material + labor ) included in “labor” figure

This is enough to get it show-ready. We still need to replace the gutters and water heater and tune the HVAC, which will add roughly another $1,000 to the total.

This means that my gut feeling that the “total purchase price” (purchase + repairs) would come to $30,000 was spot-on.

Two important caveats, though:

#1: Count Your Time

Will and I spent every weekend and many evenings working on the house, and I spent many mornings and afternoons collecting quotes from contractors and checking up on the work. I didn’t track the total time we invested, but I’d guess that we roughly spent 100 hours combined on this project.

The value of our time should be added to this equation, especially since that time represents “missed opportunity” to earn money elsewhere. Time is money: Every hour we spend doing X is one fewer hour that we can spend doing Y.

It’s hard to make a precise calculation about how much our time is worth. At $50/hr, those 100 hours represent $5,000. At $25/hr, those 100 hours represent $2,500.

What metric do we use? I have no idea. That answer hinges on “what else would we do with that time?,” which is hypothetical. I just think its important to acknowledge that the time we invested translates into some financial worth.

#2: The One-Third Rule

Sooner rather than later, we’ll need to replace the windows, siding, bathtubs and roof. These aren’t urgent tasks, but they should get done in the next 3-5 years.

Why am I mentioning this? There’s the tough question of how people should allocate the cash-flow rental income that comes in. My favorite book on real estate investing, From 0 to 130 Properties in 3.5 Years, recommends the 1/3 approach:

  • 1/3 on improving the house and/or extra mortgage payments
  • 1/3 on buying more positive-cashflow real estate
  • 1/3 on chasing capital gains (stocks, ETFs, etc.)

It’s a great suggestion, but I’m going to tweak it a bit:

  • 1/3 on improving the house
  • 1/3 on buying more positive-cashflow real estate
  • 1/3 on building a thicker emergency fund

In 3-5 years, when I can switch from “fix-it” mode to “maintenance” mode, I’ll re-evaluate. But for the moment, this is my general strategy.

Update: The house is rented! What’s the return on investment? Find out here.



Comments

  1. says

    Congrats on finishing up the house! It looks great! It must be quite satisfying to do all that work and have it all ready to sell. I think it looks like a very cool house with the big deck and high ceiling in the living room. I wonder how much more it would’ve cost if you hadn’t put in all those hours. Anyways, best of luck with the sale.

  2. says

    I’m hating on your remodel skills! You guys are great do it yourselfers and did one hell of a job. Few questions:

    What is your expectations for rent?
    How much for MITI?

    • says

      @YFS – Thank you, although I should add the disclaimer that we DID pay almost $5K for professional labor as well! That’s not all us. :-) And thank goodness! I’d be slow at installing carpet. The pros can knock it out in half a day.

      I’m expecting somewhere in the neighborhood of $800 – $1,000 for rent, gross income. And I have no idea what MITI stands for … ?

      • says

        I don’t know what MITI is, but real estate investors generally refer to “PITI” “P” = principal mortgage payment payment/month; “I” = interest mortgage payment amount/month (P+I = your gross mortgage payment each month); “T” = annual property taxes/month; and “I” = hazard insurance (property insurance)/month. Therefore, your net cash flow per month equals gross rent, less your PITI, less any monthly homeowner’s association fees, less any property management fees if you hire a property manager, less any maintenance or repair costs, less any other property-related expenses.

        • says

          @R — Yep, that’s always a calculation I make: gross rent minus mortgage, management, taxes, insurance, repairs/maintenance, and vacancy. I assume a 10 percent vacancy rate.

  3. says

    Looking good!

    We also farmed out our floors – the laminate was 4 guys over 2 days, and the carpet was 4 in a full day. Worth it, in my mind.

  4. says

    Your rental yield on this $30,000 investment is going to be amazing Paula. If you bought dividend stocks paying 4% interest, that would be your yield, and capital appreciation would be the icing on the cake.

    If you can get $10,000 a year on rental income, your gross yield on the home price will be 33 percent. After taxes and other PITA costs (pain in the ass costs) you’d still end up with an annual net yield well over 25 percent. This is how to invest. And I almost forgot. The future capital appreciation of the home is the icing on the cake. That said, I’m pretty sure you could already sell it for more than $31K. But why would you? This is going to have a great return on your investment, as a cash flow generator.

  5. says

    I would sell it…but that’s just me, I just love selling pretty houses :-)

    Paula, I would be curious, just for kicks, to find out how much you think you can sell this house for and then what would be the return with that. Humor me if you may…

    As a rental, I don’t know what your cashflow is but I will try to build a 6 month reserve ASAP and put it in the bank for when those repairs are needed. So I would put all the cashflow away for the first year or so. Without seeing the house I am guesstimating you have about $10k worth of improvements in the list you made.

    • says

      @Luis – I just ran a search on Zillow for 3 bed/2bath single-family homes in that zip code, between 1400 – 1500 sq ft. and built between 1980 and 1990. The “recently sold” results ranged from $20,000 to $70,000, with a median being somewhere between $35,000 – $60,000. Of course, I don’t know what condition those houses were in when they sold, so thats a very rough idea. At any rate, I’m interested in cash flow, not capital appreciation, and this house will have awesome cash flow. :-)

  6. says

    Wonderful! It looks beautiful. This is such a great investment, congrats! Wow, I can’t believe you were able to buy that house for such a small price. It looks similar to homes that are going for 6X that price here :)

  7. says

    Paula- amazing!! The before and after is completely different- like the paint job- it looks warm.

    This is a fantastic investment and it makes me want to go into the foreclosure market in the states! :) I’m sure you’ll be able to get $900/month rent no problem!

    • says

      @KLB — We replaced the rotted/chipping wood with new wood, and we hired a termite company to do “perimeter protection” (after, of course, getting 3 different estimates to make sure we were getting the best deal). Mold can also be easily fixed — a lot of real estate investors, especially here in the South, deal with mold issues.

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