First Real Estate Deal of the Year: a Case Study
The Basics of the Deal
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We call this deal: Three for the Price of Two.
This property was brought to us by one of our many real estate agent contacts after the property had fallen out of escrow a couple of times. The property looked rough from the street and not much better inside the front duplex. However, when you finally got to the back yard you found a small single family house that was built in the last 20 years and which was in great condition.
We were offered these 3 Units for only $53K, which in our market is not a bad price for a duplex — let alone three units. We agreed to the asking price and closed inside of 10 Days.
Expected and Initial Plan
We initially estimated the front duplex needed 10K of repairs on the inside and $5K on the outside, as it needed a lot of attention. The rear house need about $1K of work as it just needed a cleaning, some window blinds, and a fresh coat of paint on the interior.
When we saw the property the first time, the unit on the left of the duplex was a large 2 bedroom, 1 Bath with the unit on the right being a 1 bedroom, 1 bath. The rear house was 1 bedroom, 1 bath unit.
Our plan was to convert the 1/1 unit on the right into a 2/1 by framing in a second bedroom. The additional bedroom will give us at least an extra $50-$75 a month.
Our initial estimates were $16K in repairs and $1,850 in total rent.
Once we closed on the property we realized that the bathrooms were in worse condition than we initially expected, and thus had to spend an extra $5K to completely gut and replace both bathrooms in the front duplex.
This added Expense was well worth it, as the units are far more functional, and whenever we decide to sell, the new bathrooms will have added significant value.
We actually rented all three units to one family during the first week of holding it, during demolition on the interior and repair work on the outside. They lived down the street and were watching our progress.
What really caught their attention was the work we did on the outside. By the end of the first week, we had the entire duplex painted, had brand new windows put in, and framed in a nice porch.
When they filled out the rental applications, the units didn’t even have bathrooms, but they said they trusted us because they could see what care we took with the outside, and they wanted to live in the units once repaired.
We collected full deposits and got our expected rent of $625, $625 and $600 (Total $1,850).
Current Status of Property
The units are rented and we have already placed a Passive Investor in first position via his self-directed IRA. We plan to hold this property long term and would only consider selling it when the value exceeded $200K as the cash flow is so strong.
You need to invest time meeting real estate agents — especially agents in the deal flow for REO properties.
Starting on the outside works like a charm!!! We would have never rented these properties quickly if we worked on the inside and left the outside looking like garbage.
When a large and unplanned expense comes up, like having to spend $5K to gut and replace a bathroom or two, do the right thing. As a buy and hold investor it usually pays to do the correct long term thing the first time, instead of limping along.
Grade the Property
We give this Property an A. It would have been an A+ if we didn’t have the unexpected bathroom expense. Why an A? Well we bought three units for the price of two. We rented the units before repairs were complete, and we recycled 90% of our capital so we can buy the next unit.
Future Plans for Property
We plan to hold this property for the long term as it is a cash flow monster!!!