Our First Deal

37 Replies

My wife and I have two rental properties that we've converted from our personal use. One is our old townhome that we used to live in and the other is a single-family home that we bought for my parents to live in. They moved out of the area and it's been a great rental ever since (knock on wood). Last year, we partnered up with a coworker of mine and his wife and formed an LLC with the goal of acquiring buy and hold properties. This was the first purchase we made, and as of now, we consider this a success.

Purchase Price: $69,000

Closing Costs: $3,200

Rehab Budget: $55,000

Actual Rehab: $94,000

Carrying costs (utilities and grass cutting): $500

Total Investment: $163,500

ARV: $ 205,000

Cash-out: $ 147,000 (after finance closing costs)

Total Cash Invested: $ 16,500

Rent: $1595/mo

We found this VA foreclosure on the MLS in March 2014, with a list price of $89,000. By April 2014, it had dropped to $84,000. We made an offer at $65,000, which was rejected by the VA. We made another offer for $71,000, which was also rejected. Sometime over the summer, it was relisted at $72,000. We made an offer of $69,000, which was accepted, and we closed on July 25. The house was listed as a 3-bedroom 2-bath, but had 5 potential bedrooms (none of them had closets).

We spent the next two months bidding the job out with various contractors. The original rehab plan came back with bids ranging from $110-150k. We scaled back our design plans, and went with a bid for a $55,000 rehab. The plan was to rehab the house to a 5-bedroom, 2-bath home with a main floor master suite (the existing layout did not have a master suite).

What was supposed to be a 3-month rehab stretched into a 6 1/2-month rehab. During the rehab, we encountered… a break-in that removed old radiators (fortunately, we were planning to remove them anyhow); a complete failure of the relatively new boiler; a complete failure of the A/C system; rotten floor joists in an existing addition; missing ceiling joists in an existing addition (only 4 joists over a 20’ span); a rotten subroof covered up by 5-10 year old shingles; and more. In the end, we put in an entirely new central A/C and forced air heating system, all new pipes, new sump pump, and a lot of new electrical.

In any event, despite being way over budget, I think the rehab came out pretty nicely…

The exterior:

(Before)

(After)

This laundry room space later became the breakfast nook and part of the kitchen.

(Before)

(After)

This bedroom became the master bedroom:

(Before)

(After)

This odd utility space is what became the master bathroom:

(Before)

(After)

This was the hall bathroom:

(Before)

(After)

(Dual Vanities)

  

Second Bedroom:

(Before)

(After)

Study and Foyer:

(Mid-Demo)

(After)

Living Room and Foyer:

(After)

This is one of the three upstairs bedrooms.  It is by far the largest.

(Before)

(Mid Demo)

(After)

Awesome deal! Have you been able to rent it out at the rate listed in the post?

@Alex Stewart  We have received multiple applications at that rate and are currently evaluating applicants.

Nice! Great share.

Congrats!

Looks great! How did you finance 94k in rehab with only 16500 down?

thanks for sharing!

Originally posted by @Brett Pedigo :

Looks great! How did you finance 94k in rehab with only 16500 down?

thanks for sharing!

 The entire purchase and rehab were paid with cash. We financed the property after the rehab was complete. The cash out of pocket is the total spent less the cash out from the refinancing. 

great job it came out nice. how did you find your contractor ?

Mar Tell Dennis thanks. We got quotes from a few. The one we ended up using was affiliated with our property manager. Another we considered does flips with a friend of mine.

It looks great.. Good show!!!! 

@Stephen Chittenden nice job on the rehab.  And you definitely purchased right if you could go over rehab budget by 70% and still have a lot of equity when you were done. 

What will your cash flow be?  Do you expect appreciation?  Why not sell?

Originally posted by @Larry T. :

@Stephen Chittenden nice job on the rehab.  And you definitely purchased right if you could go over rehab budget by 70% and still have a lot of equity when you were done. 

What will your cash flow be?  Do you expect appreciation?  Why not sell?

Cash flow will be about $100 per month after PITI, management, and reserves for vacancy, maintenance, and cap ex. We've been a little aggressive with our cap ex reserve on this house as we replaced all of the systems, so there shouldn't be any major expenses for a number of years.

I will say, we were pretty nervous waiting for the appraisal. The rehab was painful with some new, unexpected problem everyone we turned around. We had planned about 20% for contingency, but blew through that. 

Our strategy is to generate significant long-term cash flow and worth by generating equity in each renovation so that we can cash out as much as possible from each unit and use it to purchase other properties. To that end, our strategy is for each rehab to generate 25% equity. That will allow us to finance at 75% LTV. We didn't quite make it at this one, but we'd be pretty close if not for the high closing costs on the loan. We were able to get a credit union to finance at 75% LTV on the appraised value with 4.75% fixed for 30 years. I suspect our ability to get those terms will be somewhat limited going forward, as this loan already required extra review because the two LLC members on the note already had 4 properties between them and this was number five.

@Stephen Chittenden

Way to persevere!  My hats off to you.  I would have had some sleepless nights during that.

Originally posted by @Jim Brown :

@Stephen Chittenden

Way to persevere!  My hats off to you.  I would have had some sleepless nights during that.

 Thanks, Jim.  By far, the most sleepless nights were the week we spent waiting for the appraisal to come back.  We knew we had a good contractor on board, so we knew the work was being done right.  It certainly was deflating when we kept getting calls with bad news.  Everything started off well, but then just when we thought there was nothing else to go wrong, something else would.  The roof and HVAC alone were about $20,000 of the amount we went over budget.  You take those out, and we were much closer to budget (though still way over).  The rotten floor joists, sub floor, and walls were the other big cost drivers.

@Stephen Chittenden It seems like there are always some kind of hidden surprises when you start working on a house. LOL. Congrats on yall's first deal!

Originally posted by @Mike J. :

@Stephen ChittendenIt seems like there are always some kind of hidden surprises when you start working on a house. LOL. Congrats on yall's first deal!

 Thanks, Mike. Our contractor put together this short video showing the before and after pictures. It does a nice job of showing what we did. 

https://www.youtube.com/watch?v=2i_dCCuVvlM

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