The Foreclosure Project: Final Numbers and Pictures are In!
It’s time to tie up some loose ends in my reporting to you about the Foreclosure Project.
In the previous article, I mentioned that we had rushed to finish the interior work as the house got snapped up by an eager family for a late December move-in. I posted some hasty photos from the few I had taken, and you readers requested more pictures and final details on the numbers regarding time and money spent for the renovation. So let’s start with the numbers:
My portion (carpentry, plumbing, electrical, roofing, misc.):
Estimated Work Hours : 244 Actual Work Hours: 224
Estimated Materials : $5158 + paint and misc ($2k) = $7158
Actual Materials: $6995
Work from my partner in the project: 200 hours
Additional labor paid to others: $2058
Counting the primary partner hours at $35 as we did in the budget, this adds to a total renovation cost of: $24593
Wow, that IS remarkably close to the $25,000 I originally estimated before even buying the house. But there’s an upside to this – it includes lots of work we consciously threw in once we got going and decided to make the place nicer than originally planned. For example, at least $1000 went into jazzing up the front porch and its roof, I cut out cabinets and did plumbing to allow a new dishwasher, and we did more fancy bits of trim and woodwork around doors and inside closets than originally planned.
I feel that going for this slightly higher level of quality is what allowed the house to rent for $1200/month instead of $1100. When you consider the extra $1200 per year of rental income, forever, it actually justifies a $12,000 investment (assuming you want a 10% annual return on your investment). In this case, we got that extra boost by only spending a few thousand extra!
Just to review a few more of the key figures:
Original purchase price of the house: $113,500
(price was originally 115k, but at the last minute we negotiated an additional $1500 off the price for roof/plumbing repair)
Appraisal, lender, inspection, closing fees, etc: $0 <- a huge benefit of paying cash for a house!
Utilities and taxes during renovation stage: $500
Total Cost After Upgrades: $138,593
Annual Property taxes and insurance: $1600
Allowance for Maintenance: $500
Annual Rent @1200/month: $14,400
Net annual cashflow: $12,300
Cap rate: $12,300/$138,593 = 8.9%
That’s only a moderate cap rate by bigtime landlord standards, but it is exceptional for a single family residence in this area.
Apartment buildings and multiplexes are more profitable on the surface. But the Single Family house has certain advantages as well: maintenance and hassle is low as a percentage of the income, because you only deal with one person for this $1200 per month, while a landlord of $600 apartments has to manage two tenants.
If you think of it from an early retirement perspective, you can raise a family comfortably with just two or three rental houses like the one described in this article. That implies a nice, full, Early Retirement, on somewhere between $277,000 and $416,000 of savings. In exchange, you just have to manage 2-3 properties. They are effectively creating an 8.9% “safe withdrawal rate” instead of the industry-standard 4% that you use when planning a stock portfolio. (depending on your area, you may have to discount a certain percentage for vacancy, although I always shoot for 100% occupancy myself).
Another advantage of the SFR is that its underlying value can rise even faster than its rental income, in the event of a strong housing market. An apartment building is generally worth only a multiple of its rental income. A house, on the other hand, is worth whatever an emotionally-driven home buyer is willing to pay for it. With these upgrades, this house would sell for a little over $200,000 on today’s market. So even after paying ourselves separately for labor, we created a profit of over $60,000 in just three months. In the future, I believe this neighborhood will continue to appreciate more quickly than the rest of my city since there’s only one historic district, it is close to all of the city’s best amenities, it can never expand, and most people who move here from other cities tend to choose the “old-town” area as their first choice.
Some will say that I should therefore use $200k as the cost basis when calculating the cap rate, or that we should sell the house immediately and start again on another one. Both of these are valid arguments, but in this case my friend is the owner and wants to hold onto it for future income and appreciation. (I just have an interest-earning loan against it that will be paid back to me fairly quickly).
Update: Over two years have passed and this project continues to be a good memory. The house has experienced zero vacancy, no maintenance issues, and a strong local market has allowed the rental income to increase to $1500 per month!
So with all of the business out of the way, let’s move on to the before and after pictures! Keep in mind when evaluating quality and fanciness that this is a high-speed and low-cost project. This work is not four-seasons-hotel-lobby quality – my only claim is that it represents a pretty thorough transformation of an entire house including lots of its hidden parts, for under $25,000 and in under ten weeks..
You can click on any image to get the full-sized version.
I really enjoyed this project, and I will probably repeat the process when I have enough uninvested cash collected to fund a similar one myself. Before then, I may even team up with another investor* to keep the fun going in the mean time (and accelerate the cash stashing process).
* Interested in being the investor? Or perhaps you have a house in Hawaii that needs attention during the winter season? Get in touch with me through the contact button of this blog! It’s just an off-the-cuff idea at this point, but you never know what good things come into being when you start throwing around inspirational business ideas with new people!
Epilogue, 1.2 years later: Wow, that little note at the bottom of this article did lead to lots of fun. I heard from at least a dozen interested investors (although I in the end I decided only to invest alone for my own projects, I’ve helped a few buy their own places separately). And The Hawaii comment led to this.
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