Trials & tribulations of buying my first rental with no money $
For everyone reading this is also a blog post in my member blog but I wanted to share to get feedback and motivate others.
Trials and tribulations of purchasing my first rental property with no money
(A Motivational story)
“They” always say that purchasing your first rental property or closing your first investment real estate transaction is always the hardest one. Well that quote couldn't have been any more true for myself when closing my first deal.
I first want to state that I'm writing this article to motivate others to close their first transaction and that you don't need a lot of money or need to know everything before jumping into your first real estate Investment. I also want to motivate others to not let life's trials and tribulations hold them back from following their dream of real estate investing.
I'm going to keep it simple and jump right into the details of why this deal happen and how I structured the deal with my good friend, business partner and also new investor. First I must add that i'm a new Realtor which makes the situation a little more complicated. The story begins I had saved around $10,000 to purchase a home to live in or a rental unit in the fall but was gun shy on purchasing the rental and couldn't find a affordable home. Soon after through unforeseen circumstances I had to spend most of this money on an emergency and was low on cash. This forced me to think hard about how i was going to receive income since I had quit my day job a few months prior (not smart). My idea was to purchase a rental property but how with no job and no money? I planned I would borrow money from family then partner with my friend/ current investor and purchase a property together and receive 50% of the profits. I would be the agent tasked with finding potential deals on the MLS analyzing them, then narrowing down a list of properties to visit and make offers on. My business partner who owns a large framing business with his family and has been in construction many years would bring his home building experience and the other portion of the down payment. So on with the search. With a hot seller's market we still found a few deals but settled on purchasing a 2000 build 3/1, 1,008 sf duplex in a newer neighborhood in Hagerstown, MD for $83,000, we think we could've saved a few more thousands but was ok with this price because of the homes age . For our first investment I believed this was a good deal because it was a lot newer than the 1900s built inner city homes that filled our price range. It was located in a low crime and quiet community. It was built on a crawl space which meant no leaky basements and its small size meant short mechanical runs to fix. All these seemed like educated reasons this could be a good rental along with the cash flow that easily covered the monthly mortgage by almost 2x with rent at $1,050 - $1,100 . We did have one a small leak to fix but with the minimal plumbing runs we took the chance and purchased the property without being able to turn the water on until after the purchase.
Now what actually made this transaction difficult? Me being an agent I had to facilitate the REO transaction but also as buyer I had to speak many hours about details with my business partner. Also being a business owner doesn't make it easy with financing because you have to furnish so many documents to the lender about your current company and how you substantiated your income, this was my partners dilemma. In addition since we submitted our offer on the property. Which was an REO property / HUD home also did not make it simple to deal with. The seller the Dept of HUD or big GOV didn't do much to make the process smooth for myself the agent or for the rest our team on the buyer's side. Like demanding we show proof of every single cent of the down payment money without notice in 6 hours on a Friday the day after we submitted our offer, money which was in multiple savings, stock and refinance accounts and myself obtaining a loan from family. Obtaining permission from a out of state 3rd party company to turn on the utilities multiple time. Delaying closing multiple times and forgetting simple items on the Closing Disclosure like our commission which seemed intentional but oh well it was caught. Lastly waiting until after business hours on closing day to send the final documents to the closing table. Which we believe could have been a ploy for us to walk and not close. Why? Honestly I can't say why but possibly they didn't want to actually close because the house was being sold under value and they thought they could sell it for more if it returned to the market.This is all speculation and we won't ever know because we closed. This deal was in jeopardy of not closing multiple of times but it finally did. The transaction was difficult but taught me more then I would have know if it was simple and easy. One thing I can say is REO deals are character building forsure.
So to sum up the deal. I borrowed money from family for the deal and partnered with another investor so I wouldn't have to use any of my own personal funds. I also must mention my business partner would cover for the out of pocket expenses like inspection, appraisal, minor rehab of the unit and I would manage the rehab. The unit will cash flow $440 - $460 per month after all expenses paid. Not a home run but a simple low risk deal. The plan is to do a small rehab, rent it and then Home equity loan or obtain a refinance in 6-12 months pull some cash out and purchase a 4 unit if not larger to generate more cash flow. Thank you for taking the time to read this article, believe in yourself and never stop dreaming...
Thanks for the story Trey - and at $400+/mo cash flow on a 90k property thats pretty decent especially considering you're also build equity every month. Keep us updated!
Great story, It's awesome to hear wins like this! Good luck with everything!
Congratulations Trey!
Congratulations man! Great Story!
Congratulations Trey Williams
Thank you James, Ritch, Marc and Khaled I sincerely appreciate your accolades/comments and hope this post motivates others to try this strategy and im sure it wont be as difficult as my transaction. I will definitely give updates in more post and good luck to all.
@Trey Williams you sound like perhaps the perfect person to be able to answer a question I have been asking. How are you structuring this deal to your investor? What is his stake or claim in the deal? Did you give him equity in the deal, what is your plan for paying him back? Are you splitting that cash flow with him? All in all, how is the deal structured so that it obviously benefits you but also benefits your investor/partner?
Congratulations on your first deal and I hope to be posting the same success story soon(Hopefully with less issues for closing).
@Trey Williams I'm a Hagerstown investor and am just trying to understand what you bought: Was it half a duplex with 3 beds 1 bath or was it two units each of them 3 bedrooms 1 bath?
Thanks.
@Gregory Allen Carter thank you for the comment and question
Our operating agreement is a 50/50 split. I borrowed half ($10,000) of the money from family and he brought the rest. We will split the cash flow 50/50 and any profits from a sale later on. I have to pay back my loan in 1-2 years so I am searching for more deals to roll the cash into. But the plan is to refinance at a higher AVR and purchase more rentals
@JR T. Half a duplex with 3beds 1 bath.
@Trey Williams so you have to pay the $10,000 you borrowed from family back within 1-2 years, but there is no plan to ever split from your investor. What is his involvement with the property at this point? You also mentioned that he front the bill for the initial minor rehab, did that include the labor costs of performing that rehab, or were you able to do the rehab for some sweat equity?
Thanks for the response!
Oh wow, that was only for half of the duplex? That is amazing that you are still able to cash flow over 400 on a single unit of a duplex.
@Gregory A. No plan to split with my investor. Me and him have been friends over the years so we plan to acquire more properties. He is busy running his framing business so I manage the rehabs and perform small labor task but will be sourced out later to a GC. I have background in construction so I have some experience and education managing but he has great hands on experience so we collaborate on everything rehab related idea wise. As for the rehab its around $5000 for carpet, paint, fridge, minor Plumbing repair,HVAC and small misc items. This will be a split 50/50 also ($2,500) and will be paid at the refinance point or small monthly payments, which ever is more convenient. I guess a good point is to work with friends and family if possible on the first deals because they trust you and are more flexible on many aspects or the deal.
Great job Trey! Sounds like your duplex may be on the north side of Hagerstown. REOs can a bit of headache, but it's looks like you hung in there. A bit of advice; I like to call, Investor Safekeeping:
"Keep an eye on your bottom, Keep excellent books, Keep one eye open, and most importantly; Keep good people around you, if you want to Keep the money rolling!" -Tyronne J. Clarke
Originally posted by @Gregory A.:
Oh wow, that was only for half of the duplex? That is amazing that you are still able to cash flow over 400 on a single unit of a duplex.
Sorry for the slow response but the half duplex was bought at this price and cash flows because the duplex was built in 2000 So it's not a run down old property but it cash flows because I used the MLS to run rental comps for the past 180 days within the city and our properties rent is priced actually conservatively it could be at 1,100 but i dont want to be the ceiling for this type of property in this market.
Originally posted by @Tyronne J. Clarke:
Great job Trey! Sounds like your duplex may be on the north side of Hagerstown. REOs can a bit of headache, but it's looks like you hung in there. A bit of advice; I like to call, Investor Safekeeping:
"Keep an eye on your bottom, Keep excellent books, Keep one eye open, and most importantly; Keep good people around you, if you want to Keep the money rolling!" -Tyronne J. Clarke
Thanks @Tyronne yes REOs and not easy by any means. Great quote. Thank You for the congrats and we'll have to catch up some day soon
@Laszlo S.
Excuse me for the slow response. Taxes and insurance are already included in the original numbers. We are self managing. The rehab took care of all minor repairs needed. Were aquiring a home owners warranty ($40-$50)to cover the cap x items minus roof this wasn't in the originals because we were going to replace the HVAC but now it miraculously works. If we have replaced it there be no need for the warranty because it would have been only covering the water heater which is only a $400 item plus labor. Yes risky but the roof is in good shape and you don't always need a new roof just patching will do unless we have a 100 year Storm that destroys a significant portion. Also I doubt we'll keep it 10 years. I hope this helps you with your own numbers. Thank you
Finally got this unit rented and went through sections 8 after many potential tenant request that fell through. It took the usual 1.5 months to rent and weird enough the young lady who called first out of the 30 - 40 call/ emails is out tenant. She called first and said she was in the process of signing up for sections 8 but it would take weeks to get approved. Her tenacity and me wanting the unit rented worked out in the long run. The unit is rented for $1,080. $20 less then what I would have like but i learned you can rent your unit section 8 for more then you would to normal renters. This is a gray area but I am happy because housing is paying 100% of the rent and a large portion of the utilities which are all the tenants responsibility. This deal was not easy but I finished a small rehab and went through the cities section 8 program which I see as very lucrative. Next up we would like to refinance in the future and are currently looking for a value add small multifamily we can rehab rent and refinance to pay our investors and gain a free property.