Bit of Detail - Home #3

I am new to this type of real estate business and I just finished two homes but did not have a third home in the pipeline. I was looking every day but didn't find anything I liked, style wise, location, price or condition. It bothered me that now I have no work and I felt pressure to get something right away.

Scowering the MLS I came upon an estate home that was just put on the market at 115,000, basically a small 4/1 cape cod. I looked at it that night at 8:00 with a flashlight. It was still a little light out but I had to get something under agreement soon. This home had a very large detached garage on a large lot, but what was really nice was that there was a ten acre flatland area in rear of property that will never be developed.

I turned in an offer that night at 105,000. There was another investor interested in the property so we went to highest and best. I bid 111,000 and got it. Settlement in ten days no inspections. I know houses and construction and this was a great buy. It his house was built in 1962 in a community of like homes. There are about 50 similar homes like this within 1/4 mile plus your typical ranches and comps are easy to find. ARV is 160,000 and I estimated about 30,000 in repairs. This leaves me with 20,000 in equity which as a buy and hold deal, I am comfortable with. I figured I could get 1,350 per month rent.

In my research I saw the home was purchased for 12,500. I am the second owner. I don't know if the garage was included in that price but did find out that the owner paid 1500 for a front full dormer on the second floor making the two upstairs bedrooms bigger. That was a nice addition to this home making it even more valuable. As I worked on the home I looked at homes in the neighborhood that others lived in to see how they expanded the home. Having that dormer in the second floor was nice. I also tried to equate the price as compared to new home construction. My family builds homes so I know what is charged for a home and all the upgrades. So for one of my basic homes at 325,000 , adding a big bump out for 35,000 makes sense to me , as did 1500 for a 12,500 home built in the early sixties ---same ratio.

In this home I replaced all windows, sanded entire first floor hardwood, gutted and replaced the only bath , carpeted the second floor, added insulation to the home, add central air conditioning , changed all electrical devises, added a huge deck to enjoy the massive yard and a new roof. 30,000 goes fast.

Within three days after settlement a neighbor stopped by and said this would be the perfect home for their daughter and family , would I rent to them? Ahhhhhhh YES! The daughter stopped by that day and stated that they wanted to buy the home and were scheduling a meeting to find a realtor to buy it and also get their finances in order but I beat them out. Well " he who hesitates is lost". But I had my tenant. They told me they could purchase in a year and what would price be. I told them and they said how could it be reduced, Hummm. I said the kitchen works, it's not pretty but you could always do it at another time. That would save about 7500. They liked the knotty pine original cabinets so they stayed.

I spent roughly six weeks on this home. I had 111,000 plus 30,000 in improvements---total 141,000. I get 1350 in rent. I borrowed 120,000 for 25 years at 4% for a payment of 637, taxes are under 300 a month with insurance being 72 a month. So my expenses are 1000 and I make 350 a month. The home is almost like new so I don't expect anything to go wrong for a long time. My cash in is 21,000 so I make 4200 a year or 20%. I paid off 2,600 in principle the first year adding another 12% of value to me. Where else can you invest your money and get this kind of return? Principle pay down in year two is almost 2900 which is --almost 14%. Year three is 3200 or 15+%. Wow

Just this past month I asked the tenant if they would be buying soon and they said that they still need to save more. GREAT! Take another year or two or five or ten more, to save up. . That works for me. The only mistake I made on this home was not understanding the condition of the walls. The entire first floor was wallpapered. I have dealt with wall paper but not three layers of wall paper with PAINT in between . You don't take that off , so I dry walled with 3/8 the entire first floor. Beautiful job. I had to completely remove drywall from three small wall section, because the trim would not fit the doorway if I left it. This is something a novice would not know until after the fact. But I know with a XO off a wall with standard casing you typically have less than an inch between casing and wall. If the wall is open on the opposite end you can hang your door tight to other side but when you have XO/door/OX you have to center the door so it looks good from both sides and I didn't want to rip down casing. If someone knows how to take off 3 layers of wallpaper that has 2 layers of paint let me know. But the drywall cost me under 2500, so it was money worth spending.

Project number 3 was coming to a close and I had home number 4 under agreement, another cape cod from an estate.