2nd Deal Completed (Good and Bad)

[Mohammad Nur]

Hello BP Folks,

I would like to thank you all for the contributions to the forums and community. I have learned a ton from the blog posts, forums and different members and thus felt comfortable enough to go through this path. I wanted to share my experience so that people may learn something from this or avoid making some mistakes that I did.

Background:

I had bought my first house back in July, 2019 in Baton Rouge, Louisiana which is an owner-occupied duplex in a very good neighborhood. This deal wasn’t that difficult as I was looking for a duplex in a nicer neighborhood so that I can live in one unit. Then comes my 2nd Deal which I will describe in detail and the lessons learned.

I was open to a 2-4 multifamily or single family as my 2nd investment. I had started looking around November, 2019. Picked few areas which are in nice (A-B) neighborhood and within 5-mile radius of my current home.

Deal Finding:

I have been looking in to MLS multiple times daily and had alerts set off with few criteria in Zillow, Realtor, and Redfin. I was going to local RE Meetup groups monthly and making connections, being a somewhat introverted guy, it wasn't easy to walk up to strangers and start talking. Met few guys including @Robert Leonard who is a great contributor at Biggerpockets. During this time, made few offers but didn’t have any luck.

The Deal:

End of January got a notification from Redfin about an SFH which was priced at 220 K at a very desirable location of the city (near lake, shopping, etc). This surprised me as just similar sized lots in this area gets sold for around the same price. I also got an email from my Realtor almost immediately asking me that I should look at the house and it will not remain in the market for long. Went and looked at the house after an hour. The things that I liked about the house are

1. -Built in 2009 Which is rare in this area. The newer built houses are usually getting sold for 400-800K
2. -Had a decent layout.
3. -3 bed and 2 baths (baths were smaller)
4. -1200 Sq. FT.
5. -A decent sized storage shed.

The things that I didn’t like:

• -A guy was living in the storage shed who was supposed be gone within few days.
• -The previous owner had lots of cats and the house kind of smelled bad
• -Lots of scratches made by the cats
• -Few appliances were missing.

However, these are things that most investors look for because they won’t appeal to regular home buyers.

Offer:

We made an offer of 224 K (seller pays 4 k in closing cost) – so basically a full price offer the day we saw it. We had inspection and financial contingency but put down a decent amount as earnest money deposit. The idea was if we find some other unforeseen things during inspection, we could negotiate on the price a bit.

Inspection:

• -The pier-beam foundation was in great condition and overall the house had no structural issues.
• -AC wasn’t working
• -The guy who was living on the shed showed no sign of moving out and later we found out he was squatting in the house.
• -Owner’s cats were still around the property and there were few elderly ladies who would come and feed them regularly.

So, after these findings we asked the seller to install/fix the AC or do a cost reduction. We also asked to relocate the Cats and evict the squatter before closing. Seller didn’t agree on fixing the AC as they had few cash offers if our contract falls through (as I said it was in a great area) but they agreed to relocate the cats and evict the squatter.

Financing and Appraisal:

I talked to few lenders but eventually went with my first home buying lender. 15% down and 5% interest rate. Property appraised for 245 K as is which was expected but still made feel little more comfortable.

Closing:

Closing of the property got pushed back few times as the sellers were not willing at first to spend the money to evict the squatter. Cash for keys didn’t work and finally after the eviction process the squatter left and we closed on the property.

Rehab:

We tried to not overdo and make only the necessary rehabs.

• -Painted the interior ourselves (my wife and I)
• -Updated the light fixtures and mirrors in the bathroom
• -Cleaned up the backyard which had lots of overgrown plants (my friend Brian Mackey and her wife helped me greatly)
• -Bought new Stove, refrigerator, W/D
• -Electrical connection to the shed based on code.
• -Replaced AC
• -Our initial estimate was 8K for rehab which we thought was very conservative but it ended up being close to 12K.

Rent:

When the rehab was completed (15 days after closing) and the property was listed For Rent, the state went into lockdown. We listed it at $1600 which was lower than the previous comps that we have seen for the area. But the Covid situation made it harder to rent we lowered it to $1500 after few weeks rather than taking on longer vacancy time and got it rented to qualified tenants (did background and credit check).

Numbers:

Finally, the number- Monthly rent $1500, PITI $1350. So, I will barely break even or may even take some loss from the monthly rent after expenses. Also, Covid situation didn't help with rent it out at Market price. However, the goal of this property was to hold it for 4-5 years, gradually improving it and sell it with a profit or do a 1031 exchange (after the Rehab I can probably sell it now for 260-265 K based on comps).

Lessons Learned:

• -I could have negotiated a little more and be willing to lose the house to get a price reduction
• -Putting down 20% and getting rid of PMI and a better interest rate would have been worth it.
• -Tenants don’t care that much about the location as normal home buyers do.
• -In my area, generally family renters don’t want to pay more than 1200-1300 for a house.
• -Anticipate that Rehab cost would go higher even after a conservative estimate.
• -Be Flexible and willing to change / adapt your plan.
• -List the property as soon as you close it, I had lots of quarries from people who wanted to move later.
• -Have multiple exit strategy.
• -Put contingency in your offer based on situations.
• -It’s probably best to buy houses worth around 90K -110K and make some rehabs and rent it for 1200-1300 for cashflow.

Conclusion:

I wouldn’t call this deal a home run, may be a base hit. It did teach me a lot of things. I was able to understand all the processes, coordinating with contractors, negotiation, made some more contact. Most importantly I feel more confident and I think my next deal would be much easier. This will also tell me if I am able to handle the stress and responsibilities of being a Landlord.

For my next purchase I would wait a bit and do another house hack (2-4 multifamily) and then go on from there.

Pictures:

Before

After