Recently, I completed my first flip on a duplex in the South Collinwood neighborhood of Cleveland, OH. It was a doozy and while it did not require a full rehab, it was far beyond the light version.
Many times, new investors and colleagues, whom don’t own or own very few units, will ask, given the low purchase price, why are you not holding everything you buy? Two reasons:
Reason 1: I have enough holdings for a comfortable stream of residual income. That’s the long term money.
Reason 2: I like short term money. It’s in, out and onto the next without allocating my time to Property Management, the glue which holds its altogether.
My first flip began as I was searching for an investment property for a client as another deal fell apart at the closing table. And I’m not even exaggerating. The deal literally collapsed at the closing table when the wholesaler representing the seller realized that the closing docs had the wrong street address.
Same street name, same street numbers but different placement between the second and third number. After that came to light, other barriers did as well which resulted in that property being a bad deal.
Nevertheless, it was back to the drawing board. I was searching Craigslist and came across a property that fit my investor’s requirements. I sent my contractor and Property Manager out to tour the property and report back their findings.
They mentioned the basement was dry, foundation and roof was solid but the cosmetics needed to be upgraded throughout the property as there was distressed flooring, missing toilets and bedroom doors, boarded windows and rotted porch railings. The first contractor mentioned he could do everything for $7,000+ materials. Given the steep price, I opted to get a second opinion from my contractor that has favorable pricing but unfavorable communication and accountability habits. This guy gives me fits but he’s very responsive, dependable and his carpentry services provide the best bang for my bucks so I keep him around. His quote was $1,800.
The disparity between $1,800 and $7,000 is significant so I figured the latter contractor may have under bid but with a margin of $5,200; there was enough room for some miscues and/or unforeseen repairs.
I advised my client of the property but he decided to pass. Being an investor myself, I decided to pursue the asset and made the purchase for $10,000. The property had roughly $7,000 in back taxes so I assumed the back taxes or put another way, I took a loan from the County Auditor for $7,000. Given such, I actually paid $3,080 for the property. A lot of investors steer clear of back taxes but if done correctly, that’s the secret sauce to financing an all cash transaction.
Now that the property was acquired, it was time to break ground on the rehab. After removing all the trash, my contractor realized that the floors could not be painted and had to be tiled in both units. Of course, I was less than thrilled as that was an unbudgeted expense which would eliminate a hefty slice of profits. The materials alone were $1,600, (heavy sigh).
Given it was the winter and the property had no heat service, following gas activation, several pipes were found to have burst and be leaking. This required the installation of new pipes and valves. Additionally, one of the furnaces was in need of repair. Since the furnace was ancient, the parts were expensive. For about $150 more, I opted to replace instead of repair the outdated furnace. When it was all said and done, the unforeseen expenses totaled roughly $3,000 and it would have been drastically more had deep labor discounts not been applied. Part of that was negotiation, part of that was from having longstanding business relationships.
During the rehab, I was based in in Cape Town, South Africa. The Airbnb apartment I resided at had this trendy grey flooring which appeared to be plank flooring although it was actually peel and stick tile. Inspired by the flooring, I decided to research the cost. Surprisingly, the cost differential between this sleek looking tile ($0.95/SF) and the peel and stick flooring ($0.87/SF) I currently had in place was a mere $0.08/SF. The tiled area in each apartment was 500 SF so we’re looking at a total of $80 for the upgrade. I was sold!
The new tile made a huge impression on the leads that saw the apartment and both apartments were rented in less than a month and before repairs were complete.
A month following completion of the repairs, I sold the property for a 3.75X profit. Now it’s onto the next…RINSE/REPEAT.