Upgrading is the process of replacing a product with a newer version of the same product.
Back in May's Deal of the Month I talked about buying a $315,000 townhouse in Orange for $205,000. Here it is August 10th and I still own that property, but I've yet to start on the rehab. It is costing me $1,800/month in interest payments PLUS HOA, taxes & insurance. The main holdup was California's lengthy eviction process. It took several months just to get the scumbag tenant out. Now that he is out, I am waiting on an escrow to close which is one of my lower end rental properties that I am liquidating. It might not make much sense to some, but I don't like to use money I have in the bank to do my deals. I prefer to always get new money for any projects or acquisitions. When the sale on that rental closes, my share of the profits will be $36,838. I plan on using this money to do the rehab on the Orange townhouse.
A few weeks ago, I was talking with my wife here in my office and we were discussing how I am selling off some of my rentals and I was currently focusing on wholesaling and retailing for the rest of the year. I want to build more capital for two reasons; there is never anything wrong with having lots of 'extra' money around and I'm not 100% convinced the local real estate market is doing all that well. I have some houses for sale and I've noticed that some areas are losing price stability. I have one house that I listed for a seller and it was a solid $220K back in early June. When I first spoke to her, I told her it was time to sell, but she held off. A month later she called and said she was ready to sell. I would have bought it myself, but she owes too much. I rechecked the market value and other sellers were dropping prices. I have been dropping her price a few thousand every week and we are currently at $197,900 with no interest. That's more than 10% in 60 days. Yeah, the market isn't as good as some would like you to believe. If things tank again, I want to be in a position to take advantage of the low prices like I was not able to do in 2009 when everything I love to buy was on sale.
So, back to the conversation with my wife. We were discussing stockpiling capital when she said that I should still keep any houses that would make good rentals. I agreed and then we started talking about the quality of the houses we've kept so far this year and the properties we are currently rehabbing and flipping. I started telling her about the townhouse in Orange and describing how unique it is compared to our other townhouses. We own a few around southern California and they are all excellent rentals. I like them much more than condos because townhouses are a lot like, well, attached houses. All of ours are two stories, have at least a back patio, command decent rents and they stay rented with quality renters. Townhouses as rentals have proved to be a very reliable income stream.
The thing I like about this particular townhouse is the layout. The unit is at one side of the long rectangular lot, then there is a nice middle courtyard, and at the other end is a detached 2 car garage with 2 additional parking spaces behind it. 4 parking spaces is a lot of parking for a townhouse, not to mention the awesome courtyard. Here is a pre-rehab pic looking from the kitchen patio door towards the detached garage.
I checked rents and figure this property will command about $2,200. I then got my rehab for retail bid in from the contractor and he came up with $34,977.30. Out of curiosity, I asked him to submit a rental rehab bid. Due to the condition of the property, he came in at $29,418.80. I decided it was worth it to spend the extra $5,500 to get a retail ready property with all the finest finishes and just keep it as a rental. Unfortunately, the timing was a bit off as it would have been nice to do a 1031 from the rental I'm selling into this property.