Larry has crossed over into the domain of being a professional businessman. He is a happy camper, plus he has found a great woman to work with. His plate is now full. Can he get operations under control before the budget gets out of whack? He has set a deadline, Jan 1, 2022 to have all operations running smoothly.
He closed Sept 20th on the single family house in the South Bronx. He calls the fence people to enclose the property the next day. He goes in and finds good news and bad news. He purchased the property as is, so he had no guarantees on anything working in the property.
Good news, the roof is only 5 years old, he has maybe 10 years left on it. The plumbing has all copper supply lines and PVC drains. The electrical box has current amperage standings, the wiring is sound. He only needs to replace fixtures and outlets.
Bad news, the boiler is completely shot. The walls are all cracked plaster and need to be replaced so the property has to be gutted. In order to put a bath upstairs he must go around a chimney and the cost will be expensive to run new plumbing, plus he will have to permit it.
He was looking to have a $25,000 budget, but it looks as if the budget will run to $40,000. Plus, the permitting process could cost him in time. Will he beat his deadline of Jan 1st?
He takes off work the next day and goes down to the codes administration immediately. He is lucky, September is off peak time, and his application is accepted that day with a cost of $1500, because he is putting in a bath. His codes inspector suggested, if you put in a shower instead of a bath, it will cut the cost of the permit $100. Larry was extremely pleased, he thanked the man and said that’s what he would do. This would save a great deal of work and the bathroom would be smaller making it easier to work around the chimney.
He called in the demo crew and they tore out the walls in 3 days. The boiler man took out the boiler and scrapped it. He suggested a heat pump instead of a new boiler, he would need to put in duct work while the walls were down, this way he could add central air. It would run an extra $3500, this will return your dollar 3 to 1, on resale. Larry thought, heck yea! A no brainer. In one week, Larry had the demo complete with a target date of refinish by Thanksgiving. He was moving fast. He decided to go full crew because he could not do as much work on this project, it was worth the extra cost to save wear and tear on his body and mind. This gave him more time to work with LaTasha his beautiful partner.
In one and half months, he had the bathroom in, he just had to bring in the tile man to finish it. Since he went with shower, the square footage for tile was smaller saving money. The new heat pump with central air was completed. Drywall and insulation was finished, next he brought in painters both interior and exterior and the trim man. He put in the electrical fixtures, did the landscaping, and masonry work himself. November 20th he was completed, at a cost of $42,000 rehab. That was $17,000 over budget, but the time saved was 45 days without the wear and tear on him personally. He brought LaTasha and Marvin over to look at the project. LaTasha said, “This is beautiful, Oooh, I want this house!” ‘Don’t worry, the house I buy you will be more beautiful than this.’ LaTasha, “You promise.” Yes, but this one we have to get paid on. She agreed.
Larry went back to Julia at the bank then put a rental advertisement online. Julia couldn’t give Larry final financing, but she gave him a referral to a mortgage broker, who she worked with closely. The appraisal came back at $485,000. The extra bath upstairs, and the central heat/air pushed the value up exactly like the boiler man said.
Purchase price = $284,000
Rehab cost = $42,000
Total cost = $326,000
Appraised value $485,000
Equity in Property = $159,000
Mortgage broker 65% LTV $315,250
Larry wants to borrow less at 52% LTV $255,000
Final equity in property = $230,000
Larry decides to keep his $75,000 down payment in the building’s equity. This leaves servicing cost easily manageable with the rent of $2800 per month. Mortgage payment $1,886.20 at 4% interest on 15 years. Larry did it again, he made $159,000 for 2 months work. He has $230,000 net worth in this property to do a 1031 Exchange. Larry is beginning to play chess like a Grand Master. The South Bronx house goes into his portfolio of completed profitable real estate projects. Lawrence from Sugar Hill is now a certified businessman.