Investment Property #6
In the thick of our move south in early summer, we purchased Property #6 in Oklahoma City. It is a two bedroom, one bath, single family home around 700 square feet. When we first saw pictures, we thought the house had been abandoned as it was cluttered with garbage and the bathroom looked like something terrible had happened in it. We learned the owner was selling to pay for medical treatments and was looking for someone to take the property off his hands quickly.
We purchased Property #6 for $27,000. However, it was valued at $40,000, meaning $13,000 of equity is built into the purchase. This provides a bit of leeway for renovations as the house is already worth more than what we paid for it. Renovations are estimated at around $38,000. The after repair value (ARV) is projected to be around $90,000. Once the remodel is complete, we could potentially make $25,000 if we decided to sell. Our return on investment (ROI) would be 38%. We are unlikely to make this project a flip because that doesn’t fit into our long-term strategy. Our aim is cash flow and building our portfolio to replace our income. Not to mention, this strategy allows us to keep more of our money as the profit from a flip would be subject to income tax.
Filth and Floor Plans
Our agent sent us a deal analysis and a conservative renovation budget. Aside from being filthy, the house was full of wood paneling and the bathroom was in the master bedroom, which does not make a great roommate situation. We would need to make sure the electrical was up to code, rearrange the plumbing and move some walls around to make the living space more appealing.
The property also has a dilapidated structure that needs to be torn down and a shed that’s in decent shape. We will have the construction team use the shed to secure materials and may use it later for property management or attic stock.
New Contract Model
As we mentioned in our post about investing in OKC, we work with a real estate agent that also has a construction arm as part of its services. This round, the InvestOKC owners Kendal and Micah James, took over this part of their business after dissolving a partnership. Property #6 will be the first time we will work directly with Kendal to renovate the place and also use a contract that follows the cost plus model. Traditionally, construction contracts are generally stipulated or lump sum, meaning that you get one price and it’s fixed for the life of the project, excluding any additional work or change orders.
A cost plus contract means that the price of the renovation is not fixed, but based on actuals. The contractor receives a flat or fixed fee for his or her services. Costs associated with the project such as electrical, plumbing or drywall work are budgeted in an estimate, but if a price exceeds the budget, the owner is ultimately responsible to pay for the overage. Conversely, if the price for work is less than the budget, the owner realizes those savings.
With the market being so volatile regarding material prices and labor shortages, risk is high for both contractors and owners looking to complete a remodel. We were willing to give this model a try because we know Kendal is extremely meticulous and conservative when performing his analysis and creating estimates.
Additionally, as long distance investors, we value the ability to get all our services from one shop. We have worked with InvestOKC since 2019, purchasing and renovating all but two of our six properties with this group. The first two houses we bought only required cosmetic renovations so we used our property manager’s handyman and preferred flooring contact to complete that work.
As mentioned, the cost plus model doesn’t have a fixed price so communication with the project manager is critical to monitor cost and determine what scope items need to be scrapped or modified to keep margins in line. Savings could mean we keep some money in our pocket (for future investments) or we can add some items that may be on our property manager’s wish list to make it more appealing to tenants.
The renovations are currently underway at Property #6 so we’ll provide an update after the project is complete to review the new contract model and the remodel process.
Working on an investment project that you’d like to share or have story about using a cost plus contract? Leave a comment below or email [email protected]