First Real Estate Deal of the Year: a Case Study

8

The Basics of the Deal

We call this deal: Three for the Price of Two.

This property was brought to us by one of our many real estate agent contacts after the property had fallen out of escrow a couple of times. The property looked rough from the street and not much better inside the front duplex. However, when you finally got to the back yard you found a small single family house that was built in the last 20 years and which was in great condition.

We were offered these 3 Units for only $53K, which in our market is not a bad price for a duplex — let alone three units.  We agreed to the asking price and closed inside of 10 Days.

Expected and Initial Plan

We initially estimated the front duplex needed 10K of repairs on the inside and $5K on the outside, as it needed a lot of attention. The rear house need about $1K of work as it just needed a cleaning, some window blinds, and a fresh coat of paint on the interior.

When we saw the property the first time, the unit on the left of the duplex was a large 2 bedroom, 1 Bath with the unit on the right being a 1 bedroom, 1 bath. The rear house was 1 bedroom, 1 bath unit.

Our plan was to convert the 1/1 unit on the right into a 2/1 by framing in a second bedroom.  The additional bedroom will give us at least an extra $50-$75 a month.

Our initial estimates were $16K in repairs and $1,850 in total rent.

Actuals

Once we closed on the property we realized that the bathrooms were in worse condition than we initially expected, and thus had to spend an extra $5K to completely gut and replace both bathrooms in the front duplex.

This added Expense was well worth it, as the units are far more functional, and whenever we decide to sell, the new bathrooms will have added significant value.

We actually rented all three units to one family during the first week of holding it, during demolition on the interior and repair work on the outside. They lived down the street and were watching our progress.

What really caught their attention was the work we did on the outside. By the end of the first week, we had the entire duplex painted, had brand new windows put in, and framed in a nice porch.

When they filled out the rental applications, the units didn’t even have bathrooms, but they said they trusted us because they could see what care we took with the outside, and they wanted to live in the units once repaired.

We collected full deposits and got our expected rent of $625, $625 and $600 (Total $1,850).

Current Status of Property

The units are rented and we have already placed a Passive Investor in first position via his self-directed IRA. We plan to hold this property long term and would only consider selling it when the value exceeded $200K as the cash flow is so strong.

Lessons Learned

You need to invest time meeting real estate agents — especially agents in the deal flow for REO properties.

Starting on the outside works like a charm!!! We would have never rented these properties quickly if we worked on the inside and left the outside looking like garbage.

When a large and unplanned expense comes up, like having to spend $5K to gut and replace a bathroom or two, do the right thing. As a buy and hold investor it usually pays to do the correct long term thing the first time, instead of limping along.

Grade the Property

We give this Property an A. It would have been an A+ if we didn’t have the unexpected bathroom expense. Why an A? Well we bought three units for the price of two. We rented the units before repairs were complete, and we recycled 90% of our capital so we can buy the next unit.

Future Plans for Property

We plan to hold this property for the long term as it is a cash flow monster!!!

Good Investing

About Author

Michael Zuber is an active buy-and-hold real estate investor who still has a full-time job. Michael is not an agent or broker, and simply uses the internet and agent relationships to drive his business. He currently averages at least one deal a month and has developed laser focus on his 5 step process.

8 Comments

  1. I just arrived back form the C 21 Global Convention in New Orleans. After conversing with Brokers thoughout the nation, Short Sales are out-numbering REOs in some submarkets 5 to 1. Just a interesting fact from Real Estate Professionals across the county!

  2. I’m very new at all this, but have a question that should be an easy one for someone to tackle. If my math is correct your repairs were around $21K to get this property ready to rent. Lets assume you sell this property in 2 years. Where does this $21K come into play on your taxes? The reason I ask is I’m closing on a property that I may rent or I may flip, but the tax question has me perplexed as to how long I should hold the property and at what point can I deduct the repairs or if I can. Thanks to anyone who can answer for me!

  3. Wes,

    Flip
    Accounting is typically done on a cash basis. All expenses (purchase, repairs, escrow/title fees, interest and holding costs) are added up and subtracted from all revenue (sales price) the left over amount is your profit. You pay short-term capital gain tax rate on your profit, which is typically the same as your existing tax rate.

    Rental
    You have something called a basis in the property (purchase price + long-term repairs). When you sell the property you subtract your revenue (sales price) from your basis and that is your profit. You pay long-term capital gain tax rate on your profit (which is 15%). Things can get more complicated you can expense some repairs and you can have something called depreciation which is almost always favorable to landlords.

    If it is a really good deal, you will pay a lot less tax by keeping it.

  4. It should be a good rental that will generate positive income, so it sounds like I may be better off renting it for a couple of years before selling it. Thanks for the reply Steve.

  5. Flipping a property is not easy today considering that we are having a bad economy right now. So, in order for ordinary investors to know the crucial steps to take they must first hire an agent who can help them. When flipping a property, not all investors knows which part of the home should be repaired. Sometimes they spend a lot of money only for the repairs and left with no profit.

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