Let’s talk about a deal that went sideways in every possible way... and why we still came out on top.
In early 2024, we purchased a small, 4-unit mixed-use property for $385K. It was referred to us by another investor, so we were direct-to-seller (competed with other buyers).
The business plan was straightforward: renovate two residential units, then combine the third residential unit with the commercial space to convert the building into a large three-unit residential property.
We thought we were buying it at the right price. We projected roughly $90K in renovations and a $650K sale.
Then everything that could go wrong, did:
Multiple heating systems failed.
One apartment needed a full electrical rewire.
Bad plumbing throughout.
And right in the middle of the project? A really bad roof leak that forced us to do work multiple times.
We ended up spending over $130,000 on the renovation, and the project took more than four months longer than projected...
Here's the thing, though, we still would have been fine even at $130K in costs and a $650K sale.
Why? Because we had plenty of margin, given that we bought the property at the right price.
But it gets better. We also conservatively projected our exit price. We ended up selling at $700,000.
Bottom line:
Purchase: $385K
Actual renovation costs: $130K+
Sale price: $700K
Result: Exceeded original projections
The only way to come out on top when you go over budget and over timeline significantly is if you bought the property at the right price, or if the market appreciates and bails you out. It's much easier to let the market bail you out, but that's unpredictable.
So we control what we can control: buying good deals at the right price.
This illustrates the importance of buying at the right price and giving yourself a margin of error in your underwriting, especially when doing heavy value-add projects with large renovation budgets.