Landlording & Rental Properties

Breakdown of a $30k Rental Purchase: From Offer to Closing [With Pics & Numbers!]

Expertise: Commercial Real Estate, Personal Finance, Real Estate Marketing, Business Management, Landlording & Rental Properties, Real Estate Investing Basics, Personal Development, Real Estate News & Commentary, Mortgages & Creative Financing
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Theory can kill you when it comes to investing in real estate. It's all too easy for investors to get caught up in what they could do, what they dream of doing down the road, and even in education. So what does it take to get out there and make some money now?

The top excuse of virtually all entrepreneurs, business owners, and investors is lack of money. All too often that just enables them to justify not taking action on the important things that will give them the cash they crave.

Dueling it out with the world’s ultra-wealthy to see who can pay the most money for an apartment building in Los Angeles, CA might sound fun. However, you can also get started on the other end of the spectrum by making some good returns on homes that cost less than $40,000 — if you start moving today. In the future, you can always restructure or expand by venturing into other sectors, such as multifamily. The key is to simply get started.

How am I currently doing it?

Marketing & Making Offers

If you make zero offers, you have zero chance of getting a deal today.

I tell people that you have to take a lot of action to get deals. It’s a numbers game. You really have to sift through a lot of subpar listings to find the good ones. My partner and I send anywhere between 50-100 offers on listed properties EACH WEEK. Yes, we have the help of a virtual assistant! We also speed up and streamline this process by always making sure to put a 7-day inspection period as a contingency in the contract.

Related: Case Study: Why $30k Real Estate CAN Be Profitable [With Pictures & Numbers!]

The property at 315 W. 39th Street was recently listed for $25k on the Multiple Listing Service. The seller priced this property to sell from the very start. We offered $14k.

legal-entities

Due Diligence

This property is located right around the corner from our office. So we were very familiar with the location. There is a well-known college close by (Butler University), as well as a park being revitalized. I recommend being in the know of where the city plans on putting investment dollars; this will allow for some great appreciation upside. We got right out there and took a look at the property after the offer was accepted. Turns out that after doing a property walkthrough to verify our rehab numbers, we felt comfortable with our purchase price. In pulling the rent comps, we conservatively priced the rent at $695. I prefer to price rental houses to where they do not sit on the market very long.

Negotiation

The seller on this deal was motivated. When the house was originally listed, it was priced to sell at $25k. Of course, our offer came in much lower at $14k. Thankfully, this was a situation where there wasn’t much going back and forth, as the seller wanted out. The seller did originally counter our $14k offer, but after we simply explained that due to the current condition of the home, we could only purchase it for $14k, the seller decided to accept.

Renovations

The ARV on this house is conservatively $60k. We put roughly $15k into the house with all of the updating. All in, we were at approximately $30k (50% of the value). Since we do a lot of volume in our market, we have contractors who we trust that prioritize our business, can get in and out fast, and turn properties around quickly (and with good quality). Building strong relationships with contractors is key to this business. Here is a link to the budget.

Before

Screen Shot 2016-06-07 at 10.39.49 AM

Screen Shot 2016-06-07 at 10.40.21 AM

Screen Shot 2016-06-07 at 10.40.11 AM Screen Shot 2016-06-07 at 10.40.02 AM

After

Screen Shot 2016-06-07 at 10.40.31 AM

Screen Shot 2016-06-07 at 10.40.38 AM

Screen Shot 2016-06-07 at 10.40.46 AM

Screen Shot 2016-06-07 at 10.40.53 AM

Leasing

At the time of writing this, we are currently marketing the home for rent and expect to have the property rented within 14 days of going on the market.

Closing

This was an all-cash purchase, so the closing was very swift and simple. At just $30k all in, this is the type of deal many investors could also do with their own current cash on hand, 401Ks, or with a credit card or line of working capital. Even those who don’t have access to that type of cash can certainly find a few friends to partner up with or take advantage of some form of syndication, which gives them a share of the deal.

The Numbers

$30,000 All In (Rehab/Holding Costs + Purchase)

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$3,849 Net Rental Income Per Year (See Below for Expense Breakdown)

= 12.8% Cash on Cash Return

Screen Shot 2016-06-07 at 10.42.22 AM

Due to acquiring the property at such a low price, we plan to get the property taxes appealed, which will further increase the returns.

Related: The $30k Rental Property: How to Finance & Profit From Cheap Real Estate

Summary

It can be a lot faster to get results in real estate if you focus on what you can afford to do and then just get out there to make offers, drive properties, and stake those rental signs on a daily basis.

[Editor’s Note: We are republishing this article to help out our newer readers.]

Investors: What rental purchases have you made lately? Any questions about the process described above?

Leave your comments below!

Sterling is an multifamily investor specializing in value-add apartments in Indianapolis and other Midwestern markets. With just under a decade of experience in the real estate industry, Sterling w...
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    Joel Weddington Investor from Daly City, California
    Replied about 3 years ago
    Its all relative. In my area a fixer-upper 1 bedroom 1 bath condo lists for $340k and will go for $440k quickly. I sold a studio last year for $310k which was up from $250k in less than 2 years and it was pristine, not even a fixer. But with 25% down the rent is negative cash flow. Its not the purchase price, its the principles and they work if followed. The author is not a passive investor, and shouldn’t be compared to those of us who are buying from turnkey investors. This is a very real scenario and one I’m trying to duplicate right now, having seen through the false promise of profits from TK investing.
    Mandela Muhammad Investor from Bronx, New York
    Replied about 3 years ago
    @SterlingWhite great post, your doing something right when you have haters. Thanks for showing things can be done for under 30k.
    Alan DeRossett Investor from Thousand Oaks, CA
    Replied about 3 years ago
    Congrats! This looks great. Im amazed and a bit jealous that properties can be found at such a good price point in my area this would not be possible. I never understand how Tenants could pay $695 in rent but not able to buy like you’ve done. i’ bought three properties with zero down and without banks owners carry. But some will never buy I guess. I have o long term tenants i joke about with family that they paid off our mortgage for us. but still rent.
    Kent Johnson Investor from Hartselle, Alabama
    Replied about 3 years ago
    Sterling, Thanks for all your articles and knowledge sharing. How are you able to get insurance at $22/month? I have similar properties that are $60/month. Thanks, Kent
    Dan Heuschele Investor from Poway, CA
    Replied about 3 years ago
    I would like to see the breakdown of estimated cap expense (life span and associated cost). I see no way $173 covers maintenance, vacancy and cap expense. In fact, I would be surprised if you could convince me that it covers cap expense. If I remove 5% for vacancy you have $138/month for maintenance and cap expense. The issue is the cap expense and maintenance are not as much functions of the rent as much as a function of the size/makeup of the property. Basing them on rent is flawed from the start. If I use $250 for maintenance and cap expense (which is lower than I use on my own properties) you would have just over $200/month cash flow (not bad) but this was with no financing (cash purchase). Virtually every property cash flows if it is not financed. Fortunately you made ~$30K on the rehab and maybe it has appreciated since purchase. In addition, while I suspect your cash flow numbers are significantly inflated on long-term actuals, the property likely does cash flow (just not as well as your numbers indicate). It appears to be a solid investment (instant equity and a small amount of cash flow).
    Marcus Smith Real Estate Agent from Madison, Alabama
    Replied about 3 years ago
    Excellent read…I’d love to pick your brain sometime.
    William Bates Residential Real Estate Broker from portland, or
    Replied about 3 years ago
    It must be a Midwest and down south thing. I don’t think it’s possible to buy a house that low on the west coast congrats. That’s why I’m looking to buy there, Texas and Florida….
    Rob
    Replied about 3 years ago
    Holy cow, property taxes are 9% of your purchase price, 4% of all-in price. That’s insane!