3 Reasons My First (Retail-Priced) Deal Has Become My Favorite

by | BiggerPockets.com

Back when I purchased my first investment property, an owner-occupied duplex, it wasn’t some spectacular deal. In fact, I paid retail price for it, the actual appraised value.

I didn’t use any creative financing strategies, and the seller wasn’t in distress or anything like that. I just took action. Also, as a real estate agent, my strategy on the buy was to represent myself and use whatever commissions I made to help offset the closing costs.

Little did I know that over 30 years later, it would remain one of my best properties. It’s still cash flowing to the point that it’s difficult to think about selling it. So, how did this duplex become such a great deal?

3 Reasons My First Deal Became My Favorite

1. I bought it intentionally.

Since I bought the place with an FHA loan ($67,885 mortgage at 10.5% interest with a monthly payment of $621.15) owner-occupied, it required the least amount of cash out of pocket, and the upstairs unit paid a nice chunk of my mortgage payment. In fact, with FHA financing, I was allowed to count some of the upstairs tenant’s rent towards my monthly income, which enabled me to buy a little more house than I would’ve afforded to otherwise.

thrifty-deals

Related: Your Belief That “You Make Your Money When You Buy” is Holding You Back From the Best Deals

Second, the property had below market rents due to its condition, which entailed mostly cosmetic problems like paint and carpet, and since I was a painting contractor, that was right in my wheelhouse.

Next, I was able to deduct half the expenses and/or improvements since half the property was a rental for the first five years I lived there before I moved out and made both units rentals. Keeping this property as a rental, as opposed to selling it off to move, was one of the best decisions I made.

2. I was able to pursue its “highest and best use.”

Eventually, my family was growing, and it was the perfect time to move out of this property. I had just finished renovating a house that my friend and I purchased after it had burnt down, intending to sell it after rehabbing for a nice profit. Well, the real estate market was down, and it wasn’t selling, so I decided to buy out my partner and move into it. Besides, I could live there a couple years, enjoying all the new amenities before renting it out.

As for the duplex, I also had a plan to add value to it in order to increase its appraised value and add more income streams to it. At the time, l was in need of a shop for my contracting business. The ground behind my duplex made for a nice yard while I lived there, but now I had bigger plans for that land: a four-bay commercial garage where I could keep two bays for my business and rent out the other two bays for extra income. I’ll never forget how lucky I was to get those $7 plans for a garage kit approved by the Township without even needing an architect. Talk about good fortune!

3. I utilized leverage.

But the story continues. The garage ran about $30,000 with me doing some of the drywall and labor. I put much of the rest of the costs on credit cards. By this time, I had already refinanced the original $67,885 mortgage to get out of the higher rate. Since I wanted to move my family to a nicer area, I decided to refinance the duplex and garages and use any extra money to help me pay for my next house and just rent out the twin that I have been living in. Here’s what happened next.

Remember the duplex I paid retail for at about $65,000? Well, it now appraised for $175,000, and they allowed me to get a new loan for $137,000 interest-only for 10 years. It was great because not only did I still cash flow out the wazoo, but I paid off all my credit card debt, and I got to move into a great new home that I purchased from a motivated seller.

Related: 3 Valuable Lessons I Learned From Backing Out of My First Fix & Flip Deal

As I look back on the first retail real estate purchase, I realize it was one of the best investments I’ve ever made. It always cash flowed, gave me plenty of deductions, earned me tax-free cash when I refinanced, and increased dramatically in value after building the garages. Even today, it’s still a great property. It never really mattered that I paid retail. The lesson here may be that sometimes it’s better just to take action and get that first deal.

So, how did your first real estate investment go? Do you still own it? Do you—or would you—ever buy retail?

I look forward to reading your stories. Please share below!

About Author

Dave Van Horn

Dave Van Horn is President at PPR The Note Co. - an operating entity that manages several funds that buy/sell/hold residential mortgages, both performing and delinquent. Dave has been in the Real Estate business for over 25 years, starting out as a Realtor and contractor and moving onto everything from fix and flips to Raising Private Money.

17 Comments

  1. Sonia Spangenberg

    Love that story Dave. Thanks for sharing. My son is looking at a duplex on an acreage for his first home. I’m printing this article out for him to read later. It always helps when the advice is validated from someone other than a parent. : – )

  2. Marcus Lawson

    I’m in this exact situation now where I want to house hack but trying to find a great deal in the process. So you’re basically saying the advantages of house hacking with the deductions and options afterwards can more than make up for that. #needtotakeaction

  3. Jerry W.

    Dave,
    Great article. I wish I had known more when I bought my first intentional rental unit. It took quite a few years of investing in rentals to realize what a good deal was. We simply bought when we found a cheap property. In reality nearly every house in town was a good deal back then, I just didn’t understand the numbers enough to realize it.

    • Dave Van Horn

      Thanks Jerry! Don’t feel too bad, hindsight is often 20/20. I feel the same way about private money when I was a SFR investor and a investor-friendly Realtor. I often gave away too many deals (and some of the best ones) to my clients, when I should have bought all of them myself with private money. But hey, look at the bright side, it took awhile but least we both know what to look for now.

  4. Rob Cook

    Good one Dave. I think one aspect your story reveals, is that buying QUALITY is often the better investment over time, whether in realty or tools, cars, etc. And high quality seldom gets discounted. I own $50K worth of Canon camera lenses, mostly bought back in 2001 time period. MANY of these lenses are now worth MORE used, than I paid for them new. Why? Because they were top quality, and Canon NEVER discounts at all, ever. With Real Estate, similar situations pertain, as in your story. Example, buying the nicest house in a bad location, is seldom profitable. Conversely, buying the worst house in a great location, seldom fails to be profitable. And paying a full retail current market value for a QUALITY house in a supportive location, is not paying up, it is an investment.

  5. Tessa Dramer

    I agree! My first purchase was intended to become a rental, but I bought at retail and only because I didn’t want to waste money on rent. 10 years later, my mortgage is paid down by $25,000 and value has increased by $50,000. I didn’t really break even on cash flow because I paid for big expenses out of pocket, they were never that bad. But now I see the true potential in real estate investing and this excited me to really get into trying to make money and have multiple rentals. It was a careful investment, but I didn’t follow any of the investment rules I am now learning, and I still made great money (in my opinion) with little effort while working full time.

  6. David Fruhling

    Currently reading The Book on Rental Property investing (Relatively new to the BP podcast).
    Had a fun commute with this podcast. Cool story, Dave.

    Anyone have any suggestions for BP podcasts that would help someone living in Boston, investing in his home town of Columbus, Ohio? I won’t be able to afford the Boston Housing market, but my life is here. However, I’m very knowledgeable when it comes to the greater Columbus area.

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