How I did my first investment property

General Real Estate Investing
1

Greetings to all,

I just wanted to share my story on my first investment property. Like most other people I have a day job (for now at least) that pays the bills and let’s my wife stay home and tend to our kids. As all other people I contribute to my 401K and other “Normal” savings as we have been taught to do since forever.

A few years ago I realized that I have less money in all my investment accounts that I have been putting in, there must be a better more secure way. I did a lot of research and finally ended up at this site. I have always been interested in real estate and working with my hands (think rehab and renovations). I read the posts on this forum, I found myself a target area, I learned the Fair Market Value and Market Rents in my target area, I visited probably 200 for sale homes and then… a whole lot of nothing.

I was more or less stuck analyzing every deal to death. I took to long to make an offer, my offers didn’t get accepted… what to do now…

Finally, a whole seller I have gotten to know called me, he said that he had a house under contract where the original investor had backed out of the deal for a family emergency.

The house was a SFH 3bed/1.5 bath 1100 Sq ft. ARV was 89000, Fair Market rents in the area is around 975 to 1050. based on the formulas I have learned from Mike (property manager) I offered 51,000 and the deal got accepted. :shocked

I closed on the house a couple of weeks later using a HML, The rehab process took me about 7 months due to the fact that I wanted to do it all myself and learn all the things that could pop up during a rehab.

The house needed pretty much everything, both bathrooms was gutted and redone, all flooring was replaced, the whole house inside and out repainted, the only thing I kept from the original house was the Kitchen cabinets.

Due to me doing it on my own, I managed to keep the renovation cost low. I did pay some extra holding costs since it took so long but I think in the long run it is worth it.

Once I was done, I approached a local bank that I have used for my personal business. I got a 6.38 % 30 year fixed on what I have in to the property (HML, renovations and Holding costs).

Last week I started advertising the house for rent, since I want to keep it and use to build long term wealth. The responses came in faster then I could ever imagine. I have roughly 10 well qualified tenants to choose from and I am meeting with all of them next week to have them fill out the applications. Since the economy is in the tank I offered the house at a little bit below fair market rent. The numbers looks as follows:

Monthly Gross rent $915
Operating expenses (50%) $457.50
Debt Service (65k 30year @6.38% $345
Profit (positive cash flow) $112.50

I am sorry for the long rambling but I wanted to share the joy of actually doing my first investment property, hopefully it can inspire someone else to get out there and just do it. The deal I got was made because I knew my numbers and I didn’t have time to over analyze the deal.

Hopefully I will have a well qualified tenant in as of 4/1 this year. Then I have promised the wife a month of family time before the hunt starts for property number 2. Get out there and get them, times have never been better then now to buy and hold :beer

2

Thanks for the rundown. It’s nice to see how you connected the dots. Did you have any issues with seasonong for the HML? Most that I see don’t have the seasoning issues. What’s nice about rentals is that most of them don’t require high end rehab. When I gutted and replaced my bathroom in my house, I spent about $1500 from start to finish. I could;ve skimped a little on the quality and used vynl instead of tile and went with lower end tub,sink and vanity. I’ve priced what it would take to replace the countertop, cabinets, and appliances in my kitchen and that could be a little as $2000. If I ere doing it for a rental, I could buy used appliances and save the cabinets (usually). I also like Propertymanager’s idea of painting the beat up hardwood floors. It’s much easier to repaint then to sand and stain. Home Depot has some good cheap carpet. You can even get some cheap remnants at discount furniture stores. I like to take a good look at the stuff you can’t really skimp on like the heating, roofing, plumbing etc… With your SFH, it looks like you’d be able to sell it down the road if needed and make a profit.

3

Thanks Phlemboy,

No seasoning problems, I think partially because I kept it longer then 6 months. I also did do a complete gut on the bathroom under 1500, A vanity with sink $140, Tile for the floor $100, Bath kit with three walls $500, Paint, lighting and other miscellaneous supplies $400. Since I did the labor myself I guess I should have calculated the hours and added the cost but to me that will pay off in the future. No major plumbing or structural changes makes it a lot easier…

I think I can easily sell it down the line but I like the idea of making money 5 ways with a rental property :slight_smile:

4

There’s a few duplexes under 50K in my area that I’m looking into. It looks like they need a lot of work and not in a good area. There’s not too many rentals in the good areas. Just SFH’s that are too high to cashflow. I’m thinking Section 8 may be a main source of reliable income in these areas. What’s nice about rehabbing in the low end areas is that the rehab is relatively cheap.

5

That’s the way I want to go a little bit down the line (duplex, triplex 4-plex etc), I like to stay in the lower range on SFH, I have found a target area where the low “Middle Income” people like to buy or rent starter homes. Most of the homes retail below 100K and rents are in the 900-1100 a month range.

There is also a lot of duplex and fourplexes in that are that I am eyeing in on. Would be sweet to get a fourplex where each unit cash-flows $100 per month

:beer

6

TXRehabber,

Just a few questions if you don’t mind?

  1. I am guessing that $51K was the maximum offer price you calculated from Mike’s 2% rule. Was $51K your first offer, or did you start lower and negotiate up?

  2. For all the rehab work you did yourself, did you get a contractor’s estimate for the project? If so, how much did you save on the rehab cost by doing the work yourself?

  3. Now that you have done your first rehab, what will you do differently the next time?

7

Hi Dave,

No problem,

I did start about 3-4000 lower but there was not a whole lot of wiggle room since the closing was less than a week away, I got the whole seller to come down 2500 but that was it. At that point I just knew that I had to go for this one, the numbers were so close to perfect and I needed to get one done.

I did get a few contractor estimates, I ended up having contractors put in the new windows and carpet while I focused on the rest. The most savings probably came by me doing the work. I did not charge my own time as labor (I know I should) as I was learning a lot while doing. With contractors doing everything I would probably have spent and additional 5-10K i Labor. But my holding costs would have been a little cheaper…

What I will do different next time is probably contract all of it out. Even if I learned a million new and good things, the strain it takes on me, my family and my regular job (which I plan to keep for a while if they let me) I feel that it is not worth it. If it is a lipstick only then yeah we can make that in to a family event. But as much work as this one needed, I will probably sub everything out. Of Course I will have to calculate for the added cost when I buy…

Thanks for your questions :beer

8

Thanks for the info. I have a question regarding your operating expenses. Are you just using 50% as a estimate of your monthly operating expenses, or have you calculated them out that way. I would think if you’re managing the property yourself that it seems a bit high? Just wondering. Thanks.

9

Hi Jeremy,

It might seem a bit high but I have come to trust Mike (Propertymanager) in what he does.

I have purchased his book (Which I highly recommend, no nonsense guru stuff, just the truth) and by using his 50% formula for operating expenses, I am very confident that the property will cash-flow.

If the operating costs are lower, better for me, I will get more cash-flow. I feel pretty confident that the operating costs should not be above 50%. Granted as it is my first property I am vulnerable for any major repairs that needs to be done but in the long run, if all properties qualify through the 50% rule, I will be a happy wealthy man :slight_smile:

10

Thanks, I’ll have to check out that book since I keep hearing so many great things about it!

11

Nice work TXRahabber. The first one is always the most difficult in terms of taking that emotional leap. Well done, good luck with number two.

12

Contributing your own labor is what is called “sweat equity”. You can’t add the cost of your own labor to your cost basis, so you were correct to not charge yourself for labor. The money you saved as a result of your own labor is already reflected in your equity in the property.

What are the five ways? I can only think of four – debt reduction, appreciation, cash flow and tax savings. Did I get four of the five? What did I miss?

13

Hi Dave,

I also count the equity I got when I bought the house at a great discount :slight_smile: