House #3 My first dedicated rental purchase

In early 2016 I had 2 houses, a primary I lived in and a second that I used to live in but decided to rent out instead of sell when I moved. I had been wanting to buy a pure investment property for a while at this point.

Turning a previous house into a rental is nice, but it doesn’t always produce the best deals. I wanted one that I bought purposefully as a rental from the start. So my intended plan was to find a foreclosure that I could buy cheap, rehab, rent, and then get a mortgage on later. This is commonly called the BRRRR method: Buy, rehab, rent, refinance, repeat. I needed to buy it cheap enough that when the rehab was done the mortgage would allow me to pull at least (and hopefully more than) my entire investment back out. So the house would be pure profit with no cash left invested and the rent had to be high enough to cover the mortgage, taxes, insurance, maintenance, future capital expenditure, property management, and potential vacancy.

So I had the funds to pay for the house and rehab in cash, though it took me 5 years of savings (I’ll write another blog about the specifics of how I accumulated this in the near future). This was essential because foreclosures go quickly and I wanted the ability to see a house, bid, and close FAST!

BUY: Finding an investor friendly realtor is key, my realtor is one of my most valuable business relationships, and she is one of my favorite people. She had been helping me look for units for a while now, but buying houses in a competitive market is, well, competitive. She would send me a house at 8pm and I would go see it the next day at noon and it would already be spoken for, it was brutal! 3 months of this, bidding on maybe 20 houses and this one popped up so I wasted no time and bid on it immediately (more like instantly) and won.

REHAB: Ok so house paid for, it’s in terrible condition, now I needed someone to fix it for me. Now I know some contractors, but I hate them, I had some friends who I had reached out to, but when you’re a new investor nobody believes in you. They all SAY they believe in you but they don’t, and really they shouldn’t because I hadn’t proved myself. I certainly don’t blame anyone for not taking a first chance on a person, friend or not. So I had to find a new contractor that I could trust with a fairly large job, and this is tricky. Many contractors won’t show up, their bids are all over the place, and the majority of them would come look at the house and then not even send me a bid at all. I did find someone to do this complete house and for the most part it was fine, although I overpaid by quite a bit. I had to chase him down a bunch of times, and it took way longer than it should have. That said it got done and it looked great, and I learned a lot on how to do better next time. All things considered, I was happy with the unit, it was complete, and it was ready to get rented.

RENT: For the other house I had I was self-managing at the time, but I didn’t want that job. You don’t’ really save money by managing your own units, that’s a common false understanding of the math. Pay a professional who has systems in place, and can make this passive investment truly passive, this allows you to focus your energy on things you can get the highest return on investment for your skill set. My friend Rodrick and I had just been developing a relationship talking about real estate, I hired him to manage this unit, and he has become another one of my business lifelines. Life would not be so easy for me without his help, insight, and our always growing relationship. He found a tenant in a lighting quick 2 weeks, and for the amount I was hoping for. This is important as you must properly analyze what a unit will rent for before purchase.

REFINANCE: So I had now bought this house in cash, had someone else rehab it, and now it was rented. I could sit back and just collect this rent risk and worry free for the next 30 years if I wanted to. Isn’t that what most people would do? Yeah it is, and they are dead ass wrong. It took me much longer than I had anticipated but I eventually got a mortgage on the house for a bit more than I paid for it, purchase plus rehab. If you’ve ever bought a house then you know underwriting can be tricky, and tedious. Getting a mortgage on an income producing property isn’t too hard, but the devil is in the details. Once it was finally complete though the house pays for itself each month, current and future expenses, and a bit of profit to me. Also since I have all my original money taken back out of it, it’s essentially free income. Some calculate it as ‘infinite return on investment’, since the income would be divided by my investment of zero.

REPEAT: This is the easiest part in theory. I simply have to do the same process again and hopefully get a little better at it next time. If I can do this 10 times I could retire in a few short years…or try something harder.

 

FINANCIALS:

This blog wouldn’t be helpful if it wasn’t transparent. These are the real world figures for this deal, albeit simplified:

Purchase price:    $45,000

Rehab:                    $23,000

Total cost:              $68,000

Appraisal:              $95,000

Cash-out loan:       $70,000

Cash profit:          $2,000

Equity profit:       $25,000

 

Monthly rent income:            $950

Monthly expense:

Maintenance (5%):             $47.5

Management (10%):           $95

Vacancy (8%):                      $76

Insurance ($500yr/12):      $41.6

Taxes ($900yr/12):              $75

CapEx (5%):                         $47.5

Total Expense:                           $382.6

Debt Service:                              $367.77

Total Monthly Profit:      $199.63

Total Money invested:       $0

 

Now 200 dollars doesn’t seem like a lot, and it isn’t, but it hardly paints the full pictures of profitability. First off, remember this is nothing invested, so it’s 199.63×12=$2395.56 per year essentially for free. Secondly this doesn’t take into account the full rehab has basically eliminated my maintenance and CapEx costs for a few years going forward. Also, this doesn’t take into account tax benefits and while my vacancy is set to 8% my real world vacancy rate across my portfolio has been under 5%. Add these conditions all up and the worst case scenario is unlikely to actually occur. In the meantime that difference in funds piles up and quickly allows me to buy another one.

Without debt service, the total monthly profit would be: $567.4

and the Cash on Cash return would be: 10% 

 

 

PICTURES:

Lastly, this wouldn’t be as fun without before and after pics!

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Alex Felice

Alex Felice

My name is Alex, I live in Las Vegas and I’m a very high energy, loud, and eccentric guy. I like to talk about things that are high concept and important, no small talk! I like controversy, I speak with conviction, and I’m not a fan of rules. Oh, and I'm super into real estate investment.

14 Replies to “House #3 My first dedicated rental purchase”

  1. I’d download your whole website as a guide if I could. Please never let this information disappear. You’re creating an “at your own pace” BRRRR guide for dummies. I have some debt I need to clear up before I can go all in this stuff, but I’m using this time in the meantime to get educated. This is a not in your face open room feel guide, that is also a forum where each deal you do presents a new set of FAQ’s. Super inviting and educational. I’m glad people like you exist in the world.

  2. Hi Alex – Just heard you on the bigger pockets podcast (GOLD!!). Quick question: How did you manage the rehab of this property from Las Vegas? In your article it mentioned that you had to chase the contractor a few times? Did he just not call on the updates? Did you set foot on the property to see the progress. Very curious about your strategy.

  3. Hi Alex – Just heard you at the bigger pockets podcast (GOLD!!) Quick question: How did you manage the rehab process from Las Vegas? You mentioned that you had to chase the contractor a few times? Did he just not call with updates? Video Chat? Did you eventually make your way to SC to check on the progress? Very Curious.

    1. It’s not always easy to manage long distance. I spend my time focused on building relationships now with people I know I can rely on and with aligned goals. The contractor here ended up coming through, it just wasn’t ideal and it was very stressful

  4. Hey Alex,

    With long-distance investing it is clearly very important to have a team of people you can rely on and you make sure to emphasize the you focus on building relationships. How would you suggest building a relationship with someone that you haven’t given any business to yet? (i.e. speaking with a property manager while not yet having a property they manage for you)

    1. not always easy, but you just gotta sink time in. Email contact over time to build relationships, get to know people, vet them, and most importantly your objective is to sell them on your ability to succeed. It’s certainly hardest on your first few deals, but sink the time in with people and you’ll find success

  5. How did you work out the logistics of the rehab? For instance contractors have to come see the property to give quotes. Do you have a realtor key lock box and they just let themselves in and get back to you with a quote?

    Do you give them a scope of work with instructions for what kind of finishes and products you want used or just general instructions to get it rent ready?

    1. Yeah I had 3 contractors meet me at the unit for estimates, we walk the property and talk about what needs to get done.

      No need for a lock box just give the contractor a key. They are the only ones that need to get in for the next few weeks.

      Instructions were to get it rent ready and we would meet every other week or so to discuss progress and hurdles. I ended up never using the contractor on this one ever again but the next one I found a GREAT contractor and he’s been with me since

      1. OK, now that you are doing this long distance how do you handle contractor quotes and keeping an eye on how the work is coming along? How do you get different contractors in to the building to give you quotes when you are over 1,000 miles away and how do you keep an eye on how the work is coming along? Does your property manager handle this for you? If so, what kind of incentives would be required to get the property manager to agree to this? It’s hard to imagine a property manager would want to take on the rehab management for 10% of the gross so what does it take to sweeten the deal enough for him to take this on if this is how you do it?

        Thanks for your help. You are an inspiration and sharing what you’ve learned here and on Bigger Pockets is having a positive impact on thousands of others.

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