Yes, there is such a thing as a bad investment! But how do you know if you’re making one? Let’s dive in.
Recently, we helped one of our clients buy a condo they were really excited about. There are problems with the unit: there’s a bit of mold, it needs to be renovated. They currently have a tenant that, although he is paying, has been a little bit of a headache.
So, why do we maintain that this was a good investment? The answer is simple. It all comes down to price. When looking at real estate, it’s all about whether we’ll be in the money or not. When we looked at this unit versus other renovated units in the neighborhood, the renovated places were going for anywhere between $320K and $350K. This included some basement units and first/second floors.
This unit, on the other hand, was picked up for around $270K. Not only were those other places trading for that much more, but because they were cleaner and nicer, they were usually going in multiple-offer situations. So, buyers ended up paying even more, which further increased the buffer.
Now, not everybody is going to be ready to deal with these types of renovations, or a challenging tenant. However, if you’re prepared to take it on, there’s probably a healthy profit to be made.
In this case, we analyzed that the work to be done on this property amounted to roughly $25K to $30K. Using the higher number for simplicity, that means we’re “all in” on this unit for about $300K. That’s $20K to $50K less than the comparable, plus we’re going to get the same rent that we would be getting on the renovated unit.
So, if we’re starting off in the money by $20K to $50K and we’re charging the exact same rent, that’s where the opportunity comes up. Once again, this isn’t for everybody: there’s currently a tenant in there who could be leaving, so you have to carry the property for that six to nine month period at a loss.
Once you’ve gone through that process and BRRRR’d this condo, you’ll be able to refinance the unit and have a clean, renovated unit that’s probably going to be nicer than the ones that are already on the market. You’re going to get to choose your tenant, and you’re going to have pulled out some of the money. So you really have not gone out of pocket.
If you have the cash available to do something like this, you have time on your side. Want even more insight into the process? We have lots of experience! Reach out to our team for insights and tips.