Rental Number 6 Under Contract

31 Replies

On July 15, we went under contract on our 6th rental property.  It's a townhouse and was listed for a day when our offer went in.  It's in the same complex where we have two other units - offering on this one was a no brainer for us and we called our agent and had him put an offer in, sight unseen.  All units are the exact same floor plan.

First, a discussion of our other two units in this complex.

The first one was purchased in March 2014 for $114,000. The HOA on it is $179 + $75 for a special assessment (which expires next month). It had original everything from 1974. I think even the original orange shag carpet was there, although it was matted, brown and laying quite flat by the time I bought it. Here is a picture of the original kitchen.

Here is a link to a rental ad for it, with pictures attached:

http://denver.craigslist.org/apa/5100452530.html

The remodel was $30,000 for a brand new kitchen, one complete remodel of a bathroom, one partial remodel (shower only) of a second bathroom, all new carpeting, paint, closet doors and appliances. It rented for $1950 per month and I refinanced it for $156,000 six months later - a classic BRRRR.

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The second unit was purchased in October 2014 for $155,000 and the mortgage company used the appraisal on the first unit as a comp to purchase the second.  Double whammy out of an appraisal fee!  It was pretty much turnkey - no remodel needed.  This one is rented out by the room for a total of $2450/month.

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As you can see, our experience with this floor plan and this complex is that it pretty much poops money for us.  So when I saw this most recent unit come up on the market, I pounced.

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It's been over a year since we purchased the first one and the Denver area market has been super hot.  This particular unit went on the market at $175.  We were one of 12 contracts put in over the weekend and we won it at $187.  You may wonder why the hell we offered so much.

First, a three bedroom unit in good (but not great) condition in this complex just sold for $171,500.   Therefore, I think that $175 was too low for a four bedroom.  I felt that competition would be high and at $187 purchase and $2450 rent (we're going to do this one by the room as well), we're still above a 1% rule.

 Second, this particular complex is under valued, in my opinion.  It is right across the street from a revitalization area.  A movie theater, shopping, restaurants and town center type area is going in across the street and should be opening at the end of next year. A Whole Foods, restaurants and other shopping is already within walking distance.  My personal prediction is that this complex, which is already under valued, will just increase dramatically once the revitalization is complete and the light rail station goes in.  Other areas where light rail has expanded in the last year have already seen an increase in property values.  I could be wrong though.  Only time will tell.

Third, it's tough to find a property in Denver right now that meets a 1% rule.  These are coming in at 1.2% and 1.6% respectively for the first two and this one will come in at 1.3%.  Hmmm..... maybe I need to re-evaluate my statement that 1% rule rentals are tough to find.  I seem to be finding them now, although I was having a very tough time over the winter and spring.

I intend to add to this diary as the deal goes through.  I'll talk about the inspection and any negotiations that come from that.  I'll then also talk about any remodeling that needs to be done and the process we'll go through to get the place rented.

Stay tuned!

Congrats on expanding your empire. Keep it up! 

Had you been actively looking when this unit popped up, or did it just pop up in an automated search? 

Great job @Linda Weygant !  

I like your thinking regarding the light rail stops.  Our area has finally finalized light rail plans.  Though our stops are years away from being completed, the areas have been chosen.  I'm not making it a high priority to choose properties near the stops, but I do try to check out most properties that pop up around two of the stops.  All else being equal, proximity to a future light rail stop would probably tip the scales.

Keep up the good work.

@Linda Weygant

Great job, especially the kitchen and bathroom.  I really like the cabinets in the kitchen.  Is it a custom job?

Nice job Linda!  I love the new kitchen, it looks great.  We have quite a few that I am itching to redo, and I'll have to keep those colors in mind.

Do you manage your own?  We do, and so far they are all within a few blocks of each other, makes things a lot easier!

Kelly

congrats

Keep pouncing out deals

Originally posted by @Matt M. :

Congrats on expanding your empire. Keep it up! 

Had you been actively looking when this unit popped up, or did it just pop up in an automated search? 

 I wasn't really looking.  I get an email every morning with criteria matches.  I don't really turn it off when I'm not looking, just in case.

I guess in a round about way, what I'm trying to say is that I'm always looking, even when I'm not really looking.

Originally posted by @David S. :

@Linda Weygant

Great job, especially the kitchen and bathroom.  I really like the cabinets in the kitchen.  Is it a custom job?

 Thank you.  Not custom in the slightest.  Off the shelf Home Depot unfinished kitchen cabinets.  Stained and finished by me.  If that means custom, then yeah...

Originally posted by @Kelly N. :

Nice job Linda!  I love the new kitchen, it looks great.  We have quite a few that I am itching to redo, and I'll have to keep those colors in mind.

Do you manage your own?  We do, and so far they are all within a few blocks of each other, makes things a lot easier!

Kelly

 Yeah, we self manage.  It's pretty easy with all of them spread across only two complexes.  One complex is less than a mile from our house and the other is only about 20 minutes away.

@Linda Weygant

 Congrats on the new rental and may your properties continue pooping money for you!

Way to go, I hope the new property is a blessing for you!

INSPECTION OBJECTION:

We had the inspection on the 22nd, which is the first time either Mark or I saw the inside.  There are a lot of little things wrong, like a nonfunctional garbage disposal and the dishwasher's soap dispenser doesn't pop and some other small items that will be fixed, but are so inexpensive it really isn't worth going into.  However, we did find 4 major issues:

1.  The air conditioner condenser unit has been installed outside right under the electrical panel.  This is a code violation and, according to our inspector (who is really awesome by the way), no electrician who we called to work on the panel would agree to either stand on the unit or perch above it in some wonky manner.  The condenser unit has to be moved.

2.  The utility room is a nightmare.  The safety switch on the furnace isn't working, which normally would be an easy fix, but the copper pipe running through the room is really running THROUGH the room.  When entering the room, you have to do this weird limbo dance to avoid walking right into copper pipe.  It's coming out of the front of the HVAC at about eye level, goes straight for about two feet, does a 90 degree turn (all still at eye level), goes another two feet, does another 90 degree turn and then sort of gradually works its way across the next four feet until it disappears up where the ceiling meets the far wall.  All in the middle of the room.  It looks like a monkey installed it.  Blind.  The utility room is a very generous 6 by 7 foot room and this makes the room completely unusable.  Will have to be redone.  Next time I'm over there, I'll try to remember to take pictures or video.

3. There's been some moisture seeping into the crawlspace and the culprit seems to be the grading at garden level. The grading will be on the HOA to fix. Since I already have a relationship with the HOA, this won't be an issue to get fixed. But the crack in the cement pad will continue to let moisture in and it will have to be fixed.

4.  The downstairs bathroom shower doesn't work at all.  The shower is set up so that you can't really get behind it at all, so getting this fixed will mean pulling apart the shower tile.  It's old 1970s style tile anyways and is mildew stained and kind of gross, so remodeling this is just fine.

I have an HVAC company that I work with that does decent pricing and great work.  Based on work that I've had done by them before on other properties, I was able to spitball in my own head about what they'll charge me to move the condenser and rework the mess in the utility room.  But I am going to get them over there to give me an estimate and get them started on that mess as quickly after closing as possible.

I've also worked with a concrete company before and I think I have a decent idea on what they'll charge me to fix the crawlspace concrete.  The bathroom was going to be remodeled anyways, so that isn't really a factor here.

Based on all of this, I felt comfortable asking the seller for a price reduction from $187 down to $177.  Based on earlier conversations between my broker and the selling broker, I knew the seller would want to negotiate and not take my estimates at face value, so I started out much lower than what I wanted the final number to be.  We would still have a deal as high as $182.  

The seller countered yesterday at $181,320 (no clue how she got there, but that's fine).  We accepted.

This will be the highest selling price in the complex and I'm honestly a little nervous that the townhouse won't appraise at $181,320 considering the shape it's in, but the appraisal is scheduled for August 7, with report due by August 10, so we'll see how that shakes out then.  A 3 bedroom sold for $172, but that unit was in much nicer condition.  So I'm really uncertain on this one.

As my father always said, there's no use borrowing trouble because the interest rate is crippling.  I'll worry about the appraisal if/when it comes back too low.  I'm not sure if the seller would be willing to negotiate down further or not, although we are still higher than the original list price, so theoretically, she should still be happy.

I did just run numbers on approximate rent and a pretty good estimate of monthly expenses based on our other units in this complex and it should conservatively profit about $1100/month (after all expenses, capex and turnover).

I've also gone through and done a first pass on rehab costs and those will come in at approximately $20,000.  This is mainly because Mark works for a flooring company, so we get all of our flooring product at cost +10%.  I keep waiting for his boss to protest that he's pulling an employee discount about once every 8 months, but so far all has been ok.    

This brings the total price of this townhouse to about $200K, so if you think I was nervous about the $181 price tag, you can bet that I'm groaning to myself at the $200K price tag.

So why am I still wanting to move forward?

Overall, we'll be putting something like $66,000 cash into the deal.  20% downpayment is $36K + $4K closing cost + $20K rehab + $6K for my 10% "oh crap" fund (also known as a contingency fund or an estimate slippage fund).  

With an $1100 profit, I'm pretty close to a 20% cash on cash return.  (If my math is off, please point that out).  I don't plan on appreciation, but this complex undeniably has it.  But even if it never appreciated a dime, the amount of cash we'd likely pull out of this place over the course of five years pays back our original investment.  

So as with my prior purchases, this is nothing to brag about (other than how fast these deals are coming).  It's not a home run or anything to point out and talk about how amazing it is.  But it's another solid base hit and, in this market, I'm willing to take a turtle approach.

@Linda Weygant

This is awesome stuff - nice work! The details of this deal are very helpful to learn about your strategy in the Denver-area market and your continued success. I recently moved out here to Denver in May and am a beginner REI with only one property back in NY. These posts are a great start for my real estate education. Thank you!

I've noticed that finding SF's under $200k in Denver are few and far between and many investors are using these for scrape and builds.  But there are many more options with Condos/Townhomes at this lower price point. Do you only buy Condos/Townhomes or do you venture out into SF's as well?

It also sounds like you're having quite a bit of success at renting out each room instead of a lower rent for an entire family. Are your room rentals still normal year leases (like to college kids) or are they short term rentals (like Airbnb)?

Originally posted by @Hunter Preston :

@Linda Weygant

This is awesome stuff - nice work! The details of this deal are very helpful to learn about your strategy in the Denver-area market and your continued success. I recently moved out here to Denver in May and am a beginner REI with only one property back in NY. These posts are a great start for my real estate education. Thank you!

I've noticed that finding SF's under $200k in Denver are few and far between and many investors are using these for scrape and builds.  But there are many more options with Condos/Townhomes at this lower price point. Do you only buy Condos/Townhomes or do you venture out into SF's as well?

It also sounds like you're having quite a bit of success at renting out each room instead of a lower rent for an entire family. Are your room rentals still normal year leases (like to college kids) or are they short term rentals (like Airbnb)?

 Thanks Hunter.

So far, we've bought only Condos/Townhomes, but that's because of a couple of factors:

1.  The first money we had to work with was only $30,000 for purchase and remodel.  That limited the price range we could buy in.

2.  The second deal was just like the first and since we had such good experiences with the first one, we decided the second would be great.

3. My DTI (debt to income) ratio would not support a higher purchase point.

4.  I'm really comfortable in the sub-$200 price range.  I know what the value is, what to expect, etc.  In higher price ranges, I'm less certain of market, marketability, value, rental income, etc.  I'm getting better, but anything much above $250K starts to make me itchy.  I tend to pay attention to my gut feelings.

I'll get into the higher price ranges eventually, but I really feel like I need some proven successes where I am before I start moving up.

The room rentals are 6 month leases and they are rented mostly to adults (mid 20s through mid 50s right now).  Thus far, our tenants are people separating from a long term relationship, leaving their parents' home for the first time, somebody here on temporary work assignment (which looks to maybe becoming permanent), somebody who just moved out here to take a new job and isn't sure of where they want to live permanently and somebody who is recently disabled, but is waiting for social assistance to come through and is living off of a 401k and needs to stay some place as inexpensive as possible to make her money stretch.  We also have a tenant who is a recovering alcoholic and formerly homeless who needed a solid place to get away from family and "friends" that were enabling past behavior.  I don't know if he's been sober the whole year he's been with us, but he's had the same job, pays his rent mostly on time, is spending quality time with his grandkids and generally seems to be healthier and happier than when he first moved in.

They are all responsible adults for the most part.  They each have their reasons for wanting to just rent a room and it's a scenario that is in high demand right now.  When I list these rooms during a vacancy, the most they've been vacant is about ten days.  

APPRAISAL:

The appraisal came back today.  $190,000.  (I know @Dan Mackin probably won't believe it).  So we're still moving forward.

I honestly didn't think that it would come back so high, but they used another unit that just came on the market over the weekend as a comp.  It's much nicer and is listed at $195,000.  They of course used the 3 bedroom that went for $172 as well.  I think if it hadn't been for the new one on the market, that it might not have appraised quite so high. 

But appraisal is honestly kind of a dark art in my mind.  I'm not quite sure how it all works.  Pretty sure there's a cauldron involved and maybe a magic wand and a crystal ball.

Speaking of the new one on the market, I kinda want that one as well, but my mortgage broker says that she wants to see us settle into what we've already purchased before approving us for another loan, so unless we can come up with something really extraordinary to purchase it, we'll have to let that one go.  (This makes me cry a little).

I also had my HVAC guy come and give me a quote to move the mess in the utility room as well as the condenser unit.  We couldn't go in and look at it directly, but I described the utility room and he looked at the condenser unit while he was doing an install on Property #2 (long story) and it came back very reasonable - $750, based on my description, but not firm since he couldn't see it directly.  

I have a frequent flyer card with this company - I've installed one new furnace, two new air conditioners and had a blower motor repaired with this company.  They're fast, they're good and reasonably priced and they can finance stuff through Synchrony Bank, so I get 12-18 months 0% interest on the stuff I buy from them. 

One thing I forgot to mention originally - this house has a tenant in it now and their lease ends right before we close on September 2.  I have never done a walk through right before closing before because everything we've bought so far has been vacant and I've taken the chance that things will still be ok.  Since the tenant will be moving out a few days before closing, we intend to go through and make sure there are no additional damages.

What do others do?  Do you always do a pre-closing walkthrough to make sure that things are still in good shape?

@Linda Weygant - Nicely done on the black magic. If you read through some appraiser forums it seems half of them don't exactly know how it all works either. It's the same reason that nobody measures a home in Colorado when they sell it. 10 people would all get different measurements and the same seems to go for appraisals. 

Definitely do the walk through. Things can be lurking...

I do a walk through 30 minutes before the closing appointment time. The agent(s) take the keys/lock box with them to the closing. This works where I am because we don't need attorneys for closings, it is usually handled with the title company and real estate agents in one of their offices (if you are doing cash), or in a local title company office if you are getting a mortgage. 

I would never hand over a check without doing a walk through immediately before closing. Maybe I am just paranoid, but I count on nothing without seeing it myself immediately beforehand. 

Hey Linda, congrats on what sounds like a great property! I just wanted to commend you on taking in some more transitory, perhaps less-desirable tenants... I've gotten a very negative feel regarding tenants in rentals for the most part on this board, it's really refreshing to find somebody who is willing to give the benefit of the doubt to the disabled, recently homeless, just-fleeing-the-nest sort of people, and still with a positive attitude toward them all. :)

CLOSED!


Did the walk through and all was good except I walked out on the back deck for the first time (it was raining during the inspection, so I just let the inspector go out there.  I didn't follow him).  OH SWEET LORD....   The tenants apparently let their dog go out on the back deck and just pee on the carpet they had on the deck.  I have no idea how long that's been baking back there, but the smell could knock over an elephant.

Closing went smoothly, no issues or hiccups.

Went over today and the first thing I did was tear up that carpet on the back deck.  The parking spot for the unit is close to the back deck, so we'll need to go in and out from there and it really is amazing how strong it is.  Stuffed the carpet into the trash can and still almost had an asthma attack from the odor.  I gave it a good spray with the hose to get all the dried carpet fuzz and old urine off and I think that it's just soaked into the wood now and maybe all I did was reliquify it.  Went to Home Depot and bought a product that will hopefully help, but it started raining this afternoon before I could work on it.

This townhouse shares a deck with the neighbor, divided by a little wooden fence.  The guy came over and said Hi and thanked me for buying the house.  Apparently the dog has been an issue for a while.  He asked that I not allow dogs for my renters.  I wasn't going to anyway, so I think I made a new friend today.  I didn't have a whole lot of time for chit chat, but I intend to make friends with the neighbors.  

Mark and I finally agreed on an improvement plan today, which is why I haven't really started on much before today.

Folks, I gotta tell you.  I love my boyfriend, but every time we buy a new place, we have about 5 days where we "discuss" remodel levels.  He always wants to go minimal.  I always want to make it a place I wouldn't mind living in, so we frequently start miles apart.  You would think that we would start having these discussions sooner than closing day, but we have a tough time visualizing everything until we're walking through it with no tenant, no furniture, no agent hovering and the ability to really take our time and just hang out in the place for a couple hours.

The way I handle it is this.  First, I explain my vision.  He tells me we don't need to spend so much.  I let things soak for a while.  Then I start sending him BP horror stories of properties in C and D neighborhoods (ours are B+ neighborhoods).  We talk about making sure we can charge top dollar and get great people in.  Then I start pointing out the dripping this and the disgusting that, the funky smell over there and whatever that is in the corner over there and he eventually comes around to my way of thinking.

He was convinced that we could just clean the bathtub and tile.  It wasn't until we were over there today and I threw back the shower curtain and said "ok... tell me what products will take care of this..." that he relented and agreed that it's all gotta go.  

I took a bunch of pictures today that will start the "Before" story.

Yesterday's work schedule:

Josh from Express Pros (my favorite HVAC people on the planet) came over and moved the disaster that was in the utility room.  He couldn't make it as neat and tidy as one of the installs his team usually does because he was trying to keep things affordable, which meant bending and moving the current pipe rather than just installing new.  The pipe that's in there is much larger than it needs to be and he didn't want to put too many bends in it.  He also moved the AC condenser unit from in front of the electrical panel to a different spot that complies with code.  He ended up needing to recharge the system as well because the system wasn't cooling very well.  All told, $950 for work that took him a full day due to the complications involved in trying to fix somebody else's work.  We chatted while we both worked and he told me about some real horror stories of having to fix other people's work in the past.  I now consider myself lucky.

While Josh was struggling with the AC, I spent the morning painting the kitchen ceiling and then waited for some afternoon shade to start working on the dog pee deck.  Had to get down on my hands and knees and scrape off the old glue.  Think I'm going to just throw away the sweat pants I was wearing.  

Applied the first coat of a product called Deckover, which I picked up from Home Depot for about $40 per can.  It's a bit like painting with brownie batter (looks like it too), but it fills in holes and cracks up to a quarter inch and seals the wood and seems to be doing a decent job on knocking back the odor.  In addition to being soaked with dog pee, the deck is also very weather beaten and this stuff seems to really be helping.  I didn't get a chance to finish the whole first coat as I ran out of both product and daylight at the same time.  

Congrats Linda! Sounds like you're on a roll!

Work Update:

As I was working on the dog pee deck, I noticed that the steps coming up to it were a little wobbly and splitting and probably not all that safe, so this weekend Mark spent some time replacing a bunch of stairs on the deck as well as the underlying supports.  

He also removed the carpet in the living room as it was beginning to emit a noxious wet dog smell.  Not sure why it was suddenly so overwhelming, but every time we went over and opened the door, we'd get hit with it.  Since I'm allergic to dogs, it was really becoming a problem for me to spend any kind of time over there.  So out it went.  Unfortunately, the underlay is glued to the cement floor.  That's going to be a real bear to get out.  (If anybody has any tips for that, I'd really appreciate it)

We also cut out and threw away the carpet in the upstairs bathroom.  Seriously... people.  Don't carpet around a toilet.  Or learn to aim.  Also don't carpet next to the bathtub.  The mold on the carpet tack strips and drywall is going to be annoying to deal with.  It's just a little bit, but it was yet another thing that was probably triggering my allergies in this place (Yes, I'm allergic to everything - anything with fur, most grasses, most trees, all molds....)

I've painted the ceilings in the kitchen, hallway and upstairs bathroom.  I've sanded down and begun to repaint the kitchen cabinets, which are starting to look really good.  I've got to re-build the bottoms of the cabinet under the sink and the one next to it.  There was a sink leak at some point and the bottoms of the cabinets warped.  I intend to save out a piece of linoleum from the floor and use @Dawn Anastasi's trick of lining the bottom of the sink cabinet with linoleum to prevent this kind of thing from happening in the future.

Also discovered the source of yet another smell.  I thought there was some old food or something down the disposal as any time you're close to the sink, there's an odor of something rotten.  However, shining a light down the disposal found nothing and I was really beginning to wonder where the odor was coming from.  Opened the dishwasher yesterday.  Yep.  That's gotta go.....  Ugh!

Here are a few Before Pics of the kitchen:




And During:


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