# The Foreclosure Project: Final Numbers and Pictures are In!

## By Mr. Money Mustache

## Fri, 27 Jan 2012 13:18:55 +0000

It’s time to tie up some loose ends in my reporting to you about the Foreclosure Project.

In the previous article, I mentioned that we had rushed to finish the interior work as the house got snapped up by an eager family for a late December move-in. I posted some hasty photos from the few I had taken, and you readers requested more pictures and final details on the numbers regarding time and money spent for the renovation. So let’s start with the numbers:

Materials:
Estimated Materials : $5158 + paint and misc ($2k) = $7158
Actual Materials: $6995

Labor:

My portion (carpentry, plumbing, electrical, roofing, misc.):
Estimated Work Hours : 244 Actual Work Hours: 224
Work from my partner in the project: 200 hours
Additional labor paid to others: $2058

Counting the primary partner hours at $35 as we did in the budget, this adds to a total renovation cost of: $24593

Wow, that IS remarkably close to the $25,000 I originally estimated before even buying the house. But there’s an upside to this – it includes lots of work we consciously threw in once we got going and decided to make the place nicer than originally planned. For example, at least $1000 went into jazzing up the front porch and its roof, I cut out cabinets and did plumbing to allow a new dishwasher, and we did more fancy bits of trim and woodwork around doors and inside closets than originally planned.

I feel that going for this slightly higher level of quality is what allowed the house to rent for $1200/month instead of $1100. When you consider the extra $1200 per year of rental income, forever, it actually justifies a $12,000 investment (assuming you want a 10% annual return on your investment). In this case, we got that extra boost by only spending a few thousand extra.

Just to review a few more of the key figures:

Original purchase price of the house: $113,500
(price was originally 115k, but at the last minute we negotiated an additional $1500 off the price for roof/plumbing repair)

Appraisal, lender, inspection, closing fees, etc: $0 <- a huge benefit of paying cash for a house.

Renovations: $24,593
Utilities and taxes during renovation stage: $500
Total Cost After Upgrades: $138,593

Annual Property taxes and insurance: $1600
Allowance for Maintenance: $500
Annual Rent @1200/month: $14,400
Net annual cashflow: $12,300

Cap rate: $12,300/$138,593 = 8.9%

That’s only a moderate cap rate by bigtime landlord standards, but it is exceptional for a single family residence in this area.

Apartment buildings and multiplexes are more profitable on the surface. But the Single Family house has certain advantages as well: maintenance and hassle is low as a percentage of the income, because you only deal with one person for this $1200 per month, while a landlord of $600 apartments has to manage two tenants.

If you think of it from an early retirement perspective, you can raise a family comfortably with just two or three rental houses like the one described in this article. That implies a nice, full, Early Retirement, on somewhere between $277,000 and $416,000 of savings. In exchange, you just have to manage 2-3 properties. They are effectively creating an 8.9% “safe withdrawal rate” instead of the industry-standard 4% that you use when planning a stock portfolio. (depending on your area, you may have to discount a certain percentage for vacancy, although I always shoot for 100% occupancy myself).

Another advantage of the SFR is that its underlying value can rise even faster than its rental income, in the event of a strong housing market. An apartment building is generally worth only a multiple of its rental income. A house, on the other hand, is worth whatever an emotionally-driven home buyer is willing to pay for it. With these upgrades, this house would sell for a little over $200,000 on today’s market. So even after paying ourselves separately for labor, we created a profit of over $60,000 in just three months. In the future, I believe this neighborhood will continue to appreciate more quickly than the rest of my city since there’s only one historic district, it is close to all of the city’s best amenities, it can never expand, and most people who move here from other cities tend to choose the “old-town” area as their first choice.

Some will say that I should therefore use $200k as the cost basis when calculating the cap rate, or that we should sell the house immediately and start again on another one. Both of these are valid arguments, but in this case my friend is the owner and wants to hold onto it for future income and appreciation. (I just have an interest-earning loan against it that will be paid back to me fairly quickly).

So with all of the business out of the way, let’s move on to the before and after pictures! Keep in mind when evaluating quality and fanciness that this is a high-speed and low-cost project. This work is not four-seasons-hotel-lobby quality – my only claim is that it represents a pretty thorough transformation of an entire house including lots of its hidden parts, for under $25,000 and in under ten weeks..

You can click on any image to get the full-sized version.

Note the wire barnacles, shredded roof, and sagging/rotted porch | The porch was rebuilt to have blue-stain pine columns and beadboard ceiling, as well as a galvanized roof just for some flair. Still to add: slate sides/steps
View of the back room and deck |
View of back room and deck | More random wires removed, broken hot tub sold on Craigslist (!), deck stained, and of course house painted
Tragic garage! Roof was slowly rotting away due to missing shingles. 1000 abandoned wasp nests plus and vines growing in rafters. | Same garage with very barebones upgrades: paint, siding (not quite done in pic), and the $4 windows from Re/Store
Old front door, complete with foreclosure notices | New front door ($20), with new trim, beadboard ceiling, nice posts, sweet rocking chair, etc.
Living room, before. Doesn't look that bad in the picture, although it had a cracked/sloped doorway to kitchen | New wider doorway with nicer trim - and straightened floors. (my friend the painter also sanded down and refinished all the wood floors)
Old kitchen countertop. Not a bad layout and somewhat quaint. But the shelves were only 13.5" from the countertop, and all components were just really shitty, especially the sink/faucet | I kept the same basic look but made new upper cabinets that fit the space better. Tiled the countertop and backsplash with virtually free recycled tiles. Changed door hardware, new sink/faucet. We also cut out one base cabinet and added a dishwasher instead, (acquired for $20!!)
For over sixty years, the fridge and stove sat in this ridiculous empty area across the kitchen. Somebody added a hot tub and air conditioning to this house, before they even had a place to put the package of EGGS before frying them for breakfast. INSANE!!!! | Two custom-built (but very low cost) shelving units with matching tile countertops to the rescue. Along with a flat-top range from Craigslist.
The third view of the kitchen - empty space near the window | We decided to keep the old pantry and just refurbish it, and the empty space was perfect for this nicer fridge.
The bathroom was by far the worst room in the house. Several ladies ran from it while holding their hands over their mouths to prevent vomiting. This picture, while taken after I had removed the old fixtures, still represents approximately how shitty it was. | The new bathroom is quite nice, but I still don't have any great pictures of it - it was too full of towels and toiletries to photograph on this day. But here you can at least see the custom shower curtain I welded up to match the shape of the tile showerpan I had built.
Bathroom wall, with hole for new second doorway framed in | New bathroom sink and table, made out of antique sewing table found for $20 used
The Back Room - before - Laundry machines were at the North end, which was blocking a bedroom window | After: moved laundry area to the South end, opening up the bedroom window area for this handy office area just off the kitchen
Random shot of a newer light fixture. Formerly there was a peeled white ceiling fan with a single globe light bulb - for the whole kitchen! Kitchens need multiple bright light heads that you can aim at different work areas. | Random shot of the new front door, with the cozy porch beyond, surrounded by real people's stuff. Home sweet home.

I really enjoyed this project, and I will probably repeat the process when I have enough uninvested cash collected to fund a similar one myself. Before then, I may even team up with another investor* to keep the fun going in the mean time (and accelerate the cash stashing process).

* Interested in being the investor? Or perhaps you have a house in Hawaii that needs attention during the winter season? Get in touch with me through the contact button of this blog! It’s just an off-the-cuff idea at this point, but you never know what good things come into being when you start throwing around inspirational business ideas with new people.

Epilogue, 1.2 years later: Wow, that little note at the bottom of this article did lead to lots of fun. I heard from at least a dozen interested investors (although I in the end I decided only to invest alone for my own projects, I’ve helped a few buy their own places separately). And The Hawaii comment led to this.

Update: Over three years have passed and this project continues to be a good memory. The house has experienced zero vacancy, no maintenance issues, and a strong local market has allowed the rental income to increase to $1700 per month.