Question: Should I buy a home for $315k that is worth $380k?
Hi Justin, I love your column, and was wondering is it worth it to buy a $315K home with 20-30K of renovation costs, when comps are $380K? Thanks, Robert
Thanks for connecting and thanks for reading my column.
Your question: Is it worth buying a home for $315k when it needs $20-30k in repairs after which it will be worth $380k.
Let’s break it down. Assuming all your numbers are correct and keep in mind repairs and after repair values are slippery things to nail down so there is often some fudge factor in those numbers.
$380k Sales Price
-$30,400 Buy/Sale Closing costs, Realtor, etc. Budget at least 8%.
-$315,000 Purchase price
$9,600 Profit before capital costs and taxes.
Approximately a 2.8% return on investment and no return on your time or risk taken.
This would not be a good flip deal. I only plugged in 8% for buy and sales costs but you’re typically going to pay 5% to a realtor to sell it and between 1.5% to 2% of the ARV in closing costs both when you buy and sell. Also, check to see if sellers are typically paying buyer’s closing costs in this area. That could be another 3% of the ARV.
Also, this does not include capital expenses. If you’re using a hard money loan your capital costs will easily exceed $25,000. If you have all cash then you can make a safer, easier return than 2.8% in other investments.
This is not a good flip but it doesn’t mean it’s not a good buy. If the potential rental income is high then it may be a good cash flow play. Since you didn’t mention the market rent I’m assuming you’re looking at it as a flip.
Hope this helps.