Newbie looking for advice on first purchase

[MicheleM]

Hi all. My name is Michele and I'm very new to the world of real estate investing. I have my eye on my first piece of propety (in Chicago/Cook County, IL) which I would like to buy, rehab and hold.

Ok...here's my plan. I'm a 9-to-5er with very little savings. I've researched a couple of hard money lenders to finance the purchase of the property and the rehab cost. After the job is complete, I will refinance via a conventional loan. Using part of the equity to fund my next project.

The property will need a total gut rehab. I know I will need to get a big dumpster bin, permits for the electric, plumbing and HVAC work, as well as a permit for the roof and new back porch. I'm told I can be the general contractor on this.

So that means I will have to sub contract and supervise the jobs for all the needed trades for this job. My first question is, am I on the right track so far???

My next question is, because this will be a total gut rehab, I'm fairly sure the finished floor layout for each apartment will be different than it was when the building was first built. Will this be a problem in regards to the building inspectors? Or can I have the floor layout (safely) changed as I wish without any regards to the inspectors? Will I need to hire an architect and present blue prints to the county building people?

Once the roof, back porch, rough framing, electric, plumbing and HVAC work has been completed, I will have my carpentry crew come in and finish with the dry walling, painting, tile laying, and flooring.

Start (purchase/rehab/searching for tenants) to finish (refinance), I'm hoping this can all be accomplished in 3 month (give or take a day or two).

Does this plan make sense? Am I missing steps important to the success of my plan?

ANY ADVICE and/or GUIDANCE will be GREATLY APPRECIATED. Thanks one and all.

[Debbie]

WHEW!

First off, welcome to the Magic Bullets Fambly, Michele! :SM128:

Well Michele, it is obvious that you have given lots of thoughts on how to rehab. There's one problem---lack of experience. That, in itself, can very easily send you to bankruptcy.

There's much, much, much better ways of getting involve in RE world. That is not to say that you can not realize your current dream of tackling big rehab. It's just requires you to gain a little experience to understand the consequences of a strong potential of rehab going bad.

Here's my strongest advice for newbie---read this Magic Bullets website for about a month. It's free information. No need for you (or anyone) to get into Real Estate bootcamps. Most of us got into RE world by accident or intentional and by trials and errors. Most of us read books. Heck, we even have members who became successful in RE world just by reading Magic Bullets website. They learned from reading our mistakes.

We, members of Magic Bullets, are mentors. Take advantage of our knowledges and experiences.

[dezynur]

I agree with Debbie. I've got experience with rehabbing my own properties and believe me I learn something each time. So, if you have no experience at all with construction or dealing with contractors I would start much smaller. You can easily wipe out any profit with just one thing going wrong.

Start small and work up.

Good luck.

[MicheleM]

Ok, first let me thank you all for taking the time to respond and the warm welcome.:smiley1:

Here are my numbers, I believe I could get the property and the rehab done for around $200K. The ARV will be around $325K. After paying back the $200k+ from the hard money loan (and various other fees and cost), I would refinace for about $250-$275.

Ok, maybe 3 months to complete would be stretching it a bit. The hard money loans I came across during my research will allow 6 months before the first payment would be do. Three months? Four months? Five months? Anythhing under the 6 months will be fine. The plan is to have the work completed before the first payment is due to the hard money loan people. The apartments could easily generate $1100-$1300/month (not counting the basement apt). I could get like another $600-$700 for the basement unit.

With the refiancing the interest rate could easily be cut in half compared to hard money loan rates. I see being able to pull $100+/month from each unit easily - even if I only got $1100/month per unit. And add another $600~ to monthly positive cash flow if I rent out the basement apartment.

I know this is a GREAT undertaking for someone who is totally new to the game. I have a master carpenter whom I have known for over 20 years who will be the "true" general contractor on this. I have lived in a "construction zone" many, many years ago with this same master carpenter. (Came home from the grocery store once to find part of our bedroom wall GONE!! He woke up that day and decided to put in the patio door we had planned for our bedroom, but he failed to tell me he had planned to do it on that particular cold November day. :SM031: )

I'm going to check in to the county requirements a little deeper to see if I can make him the GC on paper, since he will be the one actually on site and addressing all the issues. He has issues in his background which make him believe he should not/could not be the GC. But in the end he will be the one making all the calls and addressing all the day to day issues and making sure everyone is doing what they are suppose to be doing. He had done gutting and remods from residential to commerical so he is very much aware of weight bearing, headers and all that jazz. (I'm basically looking to lose a pantry and maybe 1 or both hall closets to enlarge the kitchen and bath areas.)

I know these were important details to the complete picture....it was just late when I did the original post and I wanted to get my question out there and provide the balance of details today when I had more time.

Yes, I'm new. I've not been able to find a local mentor to help me, so I've just decided to do some math and ask some (ok....lots of) questions. My math says I can end up with like (approx) $125 in profit/equity in this deal. Again.....am I on the right track?

The way I see it, things are just not moving too quickly these days when it comes to flipping. So I was looking at making a big first strike and killing 2 birds with 1 stone (getting money to finance my next deal and creating a positive cash flow). In the end, I hoping that this deal will enable me to venture into other areas of rei with money at hand if needed.

FYI: I see me having to hit my 401K for about $10K (netting about $6200 after taxes and penalty fees) to cover the earnest money, inspection, apprasial and other misc cost in the beginning.

[Debbie]

DO NOT TOUCH YOUR 401K!!!!!

I apologize for "yelling" but it is that important that you don't touch your 401K.

Like I mentioned, you obviously gave much thoughts and plans into it. Certainly nothing wrong with it. Not to mention that most novices do not even put together any type of plans.

With that said, you may be on to something. But you still need to do due diligent.

For examples: what's the history of the neighborhood? Have you spoken with the police officers for past crime problems? What type of neighborhood? Have you spoken with anyone at the Chambers of Commerce and/or city aldermen for potential plans in the making (ie new businesses, zonings, etc)?

Other examples: cost of insurance? Will your insurance cover you? Costs of permits? What permits does your city demands before you begin? Is your potential General Contractor licensed and bonded? Are sub-contractors available?

You can plan for things to go smoothly, but very rarely (if ever), do things get done before or by deadline date. In my case, I'm still waiting for my new custom home to be finished that was supposed to be done early last month! Why wasn't it done? Mostly due to weird multiple winter storms we had that originally caused the delays. Now, our builder has other projects going on....you get the drift....

You MUST do your due diligent. Always remember, if you couldn't do this specific building/project, there is always, always another fish at the sea.

[MicheleM]

Thank you so much for your advice in this matter. I think I will take your advice and back away from this one. I mean it's not like it's the only property out here.

And trust me, I in no way want to make a costly mistake that might land me in bankruptcy court!!!

[Debbie]

Thank you so much for your advice in this matter. I think I will take your advice and back away from this one. I mean it's not like it's the only property out here.

And trust me, I in no way want to make a costly mistake that might land me in bankruptcy court!!!

I sincerely hope that you're not backing away from claiming your dream of owning Real Estate property(ies).

I'd like it alot if you'd keep us posted on your potential RE plans. Certainly, feel free to ask us questions. We'll do the best we can to keep your head above the water filled with free RE informations!

[Jim FL]

Michelle,
You've made the right choice here.
Keep in mind one thing as you move along your investing journey.
You DO NOT HAVE to buy any property, and the deal of a lifetime comes around about once a week.

Good luck, and stick around here, we'll help you along the way,
Jim FL