My first investment property
Learned a lot, not a home run, but it is a start.
Before I begin let me give you “the back story” on me.
My wife and I have known since we started dating 5 years ago that we wanted to own buy and hold investment properties for our long term retirement plans. We both work 55-60 hrs per week as retail store managers. We have three children 6, 2, 3 months. Last spring we joined our RIA. We heard a great presentation from Coach Carson. On our drive home we realized we were not ready. We had built our credit, had our primary home, and had only some money saved. We made a commitment to cut expenses, and put money in the bank. And that we did. Fast forward a year and we had eliminated 1 vehicle, all credit card debt (Well all but 0% interest flooring for our home), and banked $15k in investable cash. I was also able to open a $15K PLOC at my bank. And that sets the stage for the past two months.
My third child was born in June, and I took some time off of course. My first day back to work I came home aggravated and frazzled. I looked at my wife and said, "We are buying a rental property by the end of the month! I'm done talking and I'm done over analyzing looking for the unicorn." So within 4 days we I had a preapproval for a conventional FHA loan. And we put an offer in on a duplex in a part of town that is near downtown, but on the up swing. Our offer was accepted. Here is where the math and details come in.
It was $156,000.Using the FHA loan I had to put down right at $7500 all said and done. A far cry from the $32,000 a traditional loan would have cost me. I got a 3.5% 30 year term. Of course being FHA it has to be owner occupied. So here is how that works. Our primary home is titled to us both but the mortgage is in my wife's name. The duplex is titled to us both, but the mortgage is in my name. I will be moving into the duplex legally while I remodel one side over the next 6 months. Each unit needs about $5k in updates to bring it to market rents. After I finish Unit B, I will flip the tenets into the freshly remodeled unit at market rates if they wish to stay. I will then move into unit A for 6 months. After that I will have met my legally required 12 month primary residency requirements and rent out unit A.
During this time it will be a negative cash flow position. I know, I know…but I have budgeted for that. I will be negative $600/month for the first 6 months, and then negative $400/month the last 6 months. So that’s $6,000. But even at that it was cheaper than putting down the $32,000 (which I didn’t have anyways). I kind of consider it financing an extended down payment at 0%.
Currently the units gross $1,150/month combined. It this market a class B finished 2/1 apartment is $900/month. For $5k each unit will have luxury vinyl plank flooring, tile tub surrounds, new cabinets, granite tops, fresh paint, and going to add about $500 in "smart" fixture such as NEST and Alexa enable lights. Now here is the kicker. The duplex sits on a full basement. It is divided in half. It needs some waterproofing, but otherwise very nice. The previous property manager was giving the tenets full use of the basement at no extra charge! That is about 600sqft (less engineering things) each for free! After the remodels the tenants will have the option of including the space for an additional $100/month. Still a better deal than a storage unit. And if they say no, then I can put them on craigslist at $100 each as just storage units. So $900 per unit, plus $100 per storage space brings me to $2,000/mo. My PIT and PMI is $1,050. Like I said not a home run, but it is a start. And I think that is what is important. And again, we have budgeted, and have funds for this plan of execution.
Now…what I learned, and what stressed me!
FIRPTA! Google it! The seller was a foreign national. To make matter worse the listing agent was a family member of the people he bought it from, and a friend of the family. The short skinny on FIRPTA is that 25% of the gross must be submitted to the IRS by the BUYER! Not really a problem, all I had to do was direct the closing attorney to withhold the funds. There are some exceptions to this withholding, but if it is not done, and it is determined by the IRS that the seller owed, the you the BUYER are responsible! Thats right! I’d be on the hook for $39,000 tax bill! Not a chance.
Sadly the agent really pushed for me to sign an affidavit saying that I intended t olive in the property for 24 moths so her friend wouldn’t have to submit the with holding. She even stated “Hes a foreigner he doesn’t pay taxes”. To which I educated her that he was conducting business in the US and Uncle Sam wants his money. I was prepared to walk and go find another property. After 4 delays the deal got done after the agent found an international tax attorney who confirmed what I had said. And in fact the seller owed two back years of taxes, and that her brokerage who was holding the money in escrow the entire two years should have dispersed funds, etc etc… So after the agent and seller realizing that taxes are as unavoidable just like death, the deal was inked. Add one delay because he is an Iraqi, and the title needed to be notarized at the US Embassy by the Vice Counsel to the embassy. But it was done, closed a month late.
So where to now? One property won’t make us financially independent. We’ve tapped out our personal funds. And we are honestly extended as far as a conventional bank would be willing to loan us a conventional mortgage (currently). In 4-5 years we want our personal residence to become a solid class B rental at about $1250/month on $800/month expenses.
For now We just set up an LLC. I'm thinking hard money lenders, BRRRR is my thoughts if I can find the right deal, the right lenders, and the right refi company.
I’m proud we’ve gotten started. I’m scared, but oh well. Stressed over finding time to renovate and manage a duplex (management and contractors in the future, but this one is going to require brute strength…builds character right?).
If you’re me what do you do for your next property? What would your time frame be?
Just want to shout out to everyone at Bigger Pockets, and these forums I lurk. You all have taught me so much!
