My experience of a year of investing in Buy, Fix, Rent
So last year I bought, repaired and rented 10 houses. These were in a town on the other end of the US from my residence and I personally only saw 3 of them before buying them. Below are some of my experiences.
1- Nothing to fix here, this is move in ready!!!
Both my realtor and contractor had told me this on a few houses up front that I hadn't seen before purchasing. What I found out is that ALL houses need something done and "nothing to fix" mean only the basics like a fresh paint job, some patching, maybe a few missing appliances, carpet/flooring that needs cleaned or replaced and a few other items.
Each time I heard this I didn't realize it meant that there's still $3,000 or more that needs to go into the unit that I hadn't budgeted. So I quickly learned to ask more questions and make more liberal budgets to avoid the surprise on houses I didn't see up front.
2- OMG this would be cool!!
On my first 3 houses we found a few items that would make the houses really neat. Adding a bathroom or converting space into other space so that the place was more like what I would want to live in. What I didn't think about was whether it added dollars to my rental rate and in retrospect found that it was mainly just eating up my investment reserves. I was guilty of over upgrading and my wallet hurts to this day.
3- Auction Sites -
This is one of my success stories. Of the 10 properties I bought the best deals were on Auction sites. They take copious amounts of paperwork and you've got to be prepared to do your thing quickly (and buy in cash on hand), but you can get really lucky and land some smoking deals. I bought one house by mistake one day when I was testing the banks "sell" limit and although I didn't really want that house it required less than 5k in work and yielded about 20k in equity (off of a 50k purchase price). I bought 2 more that needed work and enough work that it scared others off and by the time I fixed them up to rent the overall cost was well under what I'd have paid to buy a similar property off the market.
I would warn that if you are buying "site unseen" via an online auction, make sure to get advice on that property from a local realtor. If done right, however, this is an awesome way of getting cheap deals.
4- Keep a diary of expenses and help train your Realtor and Contractor-
I used to do project accounting for a new home builder and was used to breaking down costs for options on houses so this came natural to me. When discussing parts of a project with my contractor I'd go through every element of the project "so how much will the plumbing cost? What about the cabinet for the sink and the new toilet? How are we doing the tub/shower and what will that overall cost be? Oh, show the flooring? Will it be effected? And, have your priced out the towel holders and TP holder and other add ons?" Over time my contractor anticipated those questions and would add those into his estimates up front (he was somewhat of a novice but was trustworthy and reasonably priced).
5- Cheaper to see it, oh yes it is.
With items listed above I learned that if I'm going to make a large investment it just makes sense to see it first. The $500-700 in travel costs are nothing compared to a bad decision you have to live with. Here are my 2 stories:
Story 1- Saw this beautiful and inexpensive house listed in an OK neighborhood. Realtor and Contractor saw it and both said yeah this is a nice house. I buy the house and we fix it up and it's not renting. I ask the realtor why this one is so slow to rent and she tells me "well it's probably because the only bathroom in the house is in one of the bedrooms". Well OMG had I known that I don't think I would have bought this house. Why would anyone willing live in a house where they had to go into someones bedroom to do their business? Had I been there this wouldn't have happened. I did finally get it rented but between tenants it will likely cost 2-3 months vacancy so it's my dog house.
Story 2- Beautiful house comes to market in decent neighborhood. Again, Realtor and Contractor see the house and exclaim how awesome it is. It backs up to a river, has a great back yard and the inside is in decent shape. During repairs my Contractor does nothing but complain about the neighbors on both sides of the house. They've let their houses wear down to where they looked vacant and their front yards looked like they were intentionally growing waist high weeds. Again I didn't know this and a site visit would have told me to back away. Luckily this house rented quickly and steadily so I dodged a bullet.
So in the end I feel I've paid my "fool's tax", which is what my dad used to call it and hope that you all can learn from my investment in experience.
Thanks for the tips Tom.
Can you share more about the auction sites? I have been looking into this but have yet to pull the trigger as I dont feel comfortable with the process yet.
So far I've used Hubzu and Auction.com and it's worked out fine. The biggest pain is that there's a specific number that a bank wants to get called the Reserve. Typically if that number isn't hit they'll cancel the sale and you won't get the property even if you were the highest bidder.
The banks selling the properties will clear the title but you'll get title in a lesser state than Fee. The banks will pay liens and their part of taxes and assessments prior to close or leave a tax credit on the closing statement. They usually assign someone to you to help get everything closed and to answer your questions if needed.
I should also mention that these sites require a Credit Card deposit to bid but only charge if you win. You will also have to send a proof of cash on hand (not open credit) almost immediately upon winning so make sure you have the money to cover your bid.
The exciting part is when the auction's time runs out. That's when people try to swoop in and steal the property at a bid just higher than yours. On Hubzu's site thought any bid within 2 minutes of close will automatically reset the close time back to 2 minutes so nobody is able to time out a win at the last second.
I believe I bought 4 through auctions last year and 2 were substantially under market (over 10k under). One needed a ton of work but when complete I had about 10k equity in the house. On house I ended up and market value or a bit under as it needed a log of work and we were getting jerked around by an idiot inspector that cost me an extra 1500.00.
Another thing of note is that you cannot see the inside of the houses. Many are noted as vacant so you can walk up to it and look in the windows to assess any issues but if they are occupied you can't even step in the yard. I've only bought vacant ones so I've at least had a peak at the trouble I was getting into..
