Small single family properties are really great investments to make. However, it is so easy to get caught up in the “theoretical” part of real estate investing that sometimes we fail to take into account how we should go about it when we want to put our words into action. I hope that this particular post showcasing one of my real life examples will give you a much clearer view on the matter and how you should go about investing in a single family property in the real world.
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Whether it’s putting hundreds of offers on listed properties or spending on direct mail or signs, it is best to use a mix of all the different channels of marketing to fill your pipeline of leads. In today’s particular example, this lead came from a sign posted on the street on which the house was located that read, “I buy houses.”
The seller called us asking if we buy houses, and if so, whether we would consider purchasing his. Naturally, I was a little curious, and so I asked for more details on the property during our conversation. It is always important to get to know your potential property prospect as well as possible, so when you’re talking to the seller of the property or its representative, it is best to have a script or specific set of questions to ask. For more help, check out this article.
During this conversation, my main focus was to find out exactly why they were selling and how I could help them get what they needed. After all, it’s not always about money for some people, as proven by this seller. In his case, both of his parents had sadly passed away, and the property was left to him. However, he lived on other side of town and it would be inconvenient for him, hence he wanted it to be sold as soon as possible.
Fortunately, this property was located in an area we (my business partner and I) love investing in. This particular area is home to the stable working class, with tenants that have the tendency to take care of homes and stay around for the long haul. So I called the seller to set up a time to walk through the property. Walking through the property, I had the chance to see that it needed general updates throughout, such as flooring, painting, central air, plumbing and furnace.
This is by far one of my favorite things to do in real estate. The seller’s asking price for the property was $25,000, and I immediately knew that I was looking to start much lower. I always aim low with my offers and work up from there. I base my offers on the amount of renovations we would have to put into the property, which was approximately $15,000 to $18,000. The property itself was pretty outdated.
Hint: I would recommend for those that are newer to bring a contractor with you to help with determining the renovation budget.
The seller explained to me that he was firm on his asking price, although understanding his situation, I knew there would be room for negotiation. I determined that the most I would pay for the property was $18,000, so I decided to offer him $12,000 on the spot while we were together. The seller didn’t counter my offer at the time and instead explained he’d call me if he thought we could work something out.
I wasn’t going to overpay for the property, and I chose not to show my desire to purchase the property by pushing the conversation any further, so we shook hands and left. His motivation to sell and detachment to the property showed in full force when he called me a couple of days later to inform me that he would accept my offer of $12,000. So my final note on property negotiations is to always be prepared. Aside from knowing how to successfully estimate the renovation expenses, you should also do your best to understand the seller’s situation — if there’s motivation, then there’s almost always a great deal to be struck.
This was an all-cash purchase, and we used a title company, making it a very straightforward purchase. So within about seven business days, the property closed, and the seller transferred the possession to us.
Once we sealed the deal, my partner and I did a line by line item budget on property. We then gave the budget to our contractor as a template of the exact work we wanted to be completed. This project took approximately four weeks from start to finish. As always, we took a cookie cutter approach when it came to rehabbing this property. After all, our motto is to keep it simple and don’t spend more than you have to.
When renovating our rental properties, it is our goal to renovate it in a manner that we will not have to deal with any large expenses during the first five years of ownership. This means replacing old roofs, updating plumbing, and installing new HVAC systems if needed. Here is budget to contractor we use.
The property was on the market 10 days before we acquired an approved tenant. I must say that we struck gold, as we found one great tenant: a mechanical engineer who worked downtown and liked the commute. He and his family signed for a two-year lease at $740/mo.
$32,000 All-In (Rehab/Holding Costs + Purchase)
$5,100 Net Rental Income Per Year (See Below for Expense Breakdown)
= 15.9% Cash on Cash Return
I hope this breakdown of an actual property purchase will benefit you in your endeavors. My partner and I have had tremendous success in our investing career with properties under the $40,000 price point. However, you have to keep in mind that having the right systems and team is crucial.
[Editor’s Note: We are republishing this article to benefit our newer readers.]
Investors: What do you think of this deal? Do you include cheap real estate in your portfolio? Why or why not?
Leave a comment below!