Our 4th house was our best rental property purchase yet. It came with our 5th house! We will tell you about buying this property and share our numbers (skip to the end if the numbers are what you’re most interested in!)
Time to Do Something
In Fall 2016 we were itching to find a new college rental property. Our 3rd property—a 100% remodel due to a fire—was up and running, and we were excited to get another property. Over the past few months we had looked at a few houses, but we couldn’t find one that we really wanted to go for.
Now, I love a good deal. I get excited about BOGO sales at the grocery store and anywhere else, really. But I never imagined we would have a BOGO real estate deal! (Especially one that would actually be any good.)
Then in October 2016, I found a promising, brand new listing on Zillow. It was a nice looking, 2-story, 4-bedroom house just 3.5 blocks from our local university—an easy walk to campus! It was listed at $110,000, which we felt was way overpriced for our local market. And there was this weird thing. The little house next door was included in the sale. The listing described it as “of little or no value”. The owner was throwing another house into the deal?? Odd. We had to check this out.
The Drive by Inspection
We loaded the kids up and drove by the property. The larger house looked great and there was parking for 4 cars (always important for a house full of students). And there next to the listed house was a tiny run-down shoebox-shaped house. The siding had holes in it, a couple of windows were broken, and the roof needed replaced 20 years ago. It looked very… unfortunate. Scroll down a bit for a picture, but only if you want to be jealous.
Mr. College Rental was still trying to recover from his strenuous complete renovation of our 3rd property. But he agreed that we needed to look closer at this deal.
A Look Inside
Our real-estate agent quickly set up a showing. We immediately realized why the listing had no pictures of the interior. The owner’s belongings were literally packed floor to ceiling in some rooms! The owner had been primarily using the house for storage of antiques and collectables. We had to use some imagination because it was difficult to look at a house full of stuff that looked like it hadn’t been touched in years.
But we could tell it needed a little work–mostly cosmetic. The upstairs needed painted. The hard wood floors had some pet stains and there was a weird hole in one of the bedroom walls that needed patched.
The kitchen needed the most work. The laminate countertops had been stained, chipped and ruined. Someone had removed large sections of the tile backsplash. The sink was in terrible shape and the faucet was worse. The very dated kitchen linoleum had holes and stains.
But the biggest (and most expensive) problem was the block walls in the basement. Two walls were clearly pushing in and would need to be replaced soon.
We also saw several positive things about the house too. The layout was cute and there were hardwood floors throughout most of the house. Both bathrooms (1 full and 1 half) had been nicely redone. There was a great patio in the backyard surrounded by foliage to give some privacy. It had a very cozy chic charm, and a wonderful wrap around porch that we could envision students really loving to hang out on.
The Pros and Cons
It didn’t take us long to decide we really liked this house. We thought the pros of the house definitely outweighed the cons, which were mostly fixable.
• Location, Location, Location • Only 1 Full Bath
• 4 Bedrooms • Needs some work done
• Hardwood Floors • Basement walls need replaced
• Attractive Exterior • Overpriced
• Nice hangout areas (Porch and Outdoor Patio)
• Nice Floor Plan
We really love it when we are both on the same page about a house (or anything for that matter). There was no waffling or questioning whether this was really a good property. We were both sure this would be a great property if we could keep the purchase price and repair costs low enough.
You Have To Take This House Too
The little house didn’t enter our discussions much because we weren’t sure if it was a Pro or a Con. We had walked through it, discovering it had one bedroom and one bathroom. And it was occupied. But the tenant had so many belongings that we couldn’t tell exactly what its interior condition was. It clearly needed a new roof, bathroom redone, broken windows fixed, siding, and it had a problematic foundation wall. It sure didn’t look like a Pro on the surface. We were already tossing around the idea of tearing it down and building something else. Later we learned the little house was on the same lot as the big house. We figured the seller didn’t want the bother and expense of trying to divide the lot and sell the little house by itself when it was in such bad shape. We decided to ignore it for now and focus on the big house.
Getting Numbers on the Deal
We needed to figure out how much we were willing to pay for the big house. It clearly needed some work, but how much?
We did a second walk through and estimated the cost of repairs Mr. College Rental would do. He couldn’t do the block walls, so we asked a local block layer to give a bid. We asked our insurance agent for a quote on insurance coverage for the house and made note of the taxes on the place. We decided what range we thought the house would rent for once the repairs were completed, and calculated what our cash flow would be even if the seller wouldn’t come down much in price
Securing a General Promise of Financing Before Offering
We took all these numbers to our banker, who agreed it looked like a good investment on paper. But when we told him the foundation would need work, he wanted to see it for himself.
Fortunately, he really liked the house. When the tour was over, he gave us his verbal approval to make an offer. (I really love working with small banks!) We didn’t have enough cash to cover both the down payment and the repairs. So, he gave us two options—both for 20-year 5/1 ARMs. We could pay cash for the down payment and secure a construction loan for the needed repairs, or we could leverage a property we owned outright for the down payment and pay the repairs out of pocket. Our numbers indicated the repairs were likely to be lower than the down payment, so we went with the latter option.
Now that our banker was on board, what to offer? We aren’t so great at this part. I’m a really bad negotiator. We tend to want to offer way too close to the price we really hope to pay for a property. Even though I want a good deal, I feel bad if I think we are getting “too good” of a deal, which is probably ridiculous. Fortunately, our realtor has so far been great about giving us an honest opinion of what he would offer. He agreed it was overpriced, especially given all the work that needed to be done. He suggested he would offer in the $70s.
Yikes, that seemed low!! We hoped to get the house for somewhere in the mid-80s. We were kind of worried the seller might be insulted by an offer in the 70s! Wincing, we took his advice. The seller countered with $95,000. We countered with $83,000. When the seller came back with $89,000, we agreed and signed a contract contingent on financing. The house had only been listed for 17 days.
The Little House Has a Surprise!
We asked that the seller have the tenant in the little house move out before closing. “Why would you have a paying tenant removed?”, you ask? One, we knew the little house needed a ton of work—maybe even torn down to make way for something new. Two, the seller did not have a lease with the tenant and he was living there month to month. And the seller was not very forthcoming with any information about the tenant or any payment history. We were afraid we were going to inherit a bad tenant and wanted the seller to deal with that problem before closing.
The Seller’s Lack of Communication was Making Us Leery
We were very persistent in trying to find out information on the tenant and finally learned he was a respectable professional who had lived there 17 years! He paid $375 a month in rent. We quickly backpedaled. We wanted him to stay! I looked up his phone number from his employer’s website and called him up. I explained that we were the buyers and would love for him to stay if he wanted. He did not want to move and happily agreed to stay. Great! Now we would immediately be bringing in a small amount of rent and we wouldn’t be uprooting anyone!!
Now the Work Begins
We closed on the house at the beginning of December 2016. We knew from our local rental cycle that we would need to find tenants in January or February (although their lease wouldn’t begin until May), so after Christmas Mr. College Rental quickly began to rip things out of the kitchen, fix the hole in the bedroom wall, and clean up the trash the seller had left in the house. We found great tenants despite the house being mid-renovation. In early February they signed a lease to begin May 1, so now Mr. College Rentals had to get a move on to get everything done!
Making it Great Again
The hardwood floors were in great shape except two spots damaged by pet urine. We were able to sand and repair the spots on the floor and then refinish all the floors upstairs.
All the bedrooms were wall papered but only room was nice enough to leave it up. The plaster underneath was in good shape with a couple of exceptions. In one bedroom someone had picked a hole in the plaster about the size of a large pizza and the ceiling was about to fall down in another. We had to use sheetrock and repair the hole in the plaster and we replaced the ceiling with sheetrock as well.
The kitchen required the most work. The countertop was a no brainer, because it was a cheap countertop that had been nicked and badly stained. We ripped it out, and installed a new one. The cabinets were in very good physical shape. We did not want to spend a lot of money, so we refinished them. The plaster walls needed paint. The remaining backsplash also needed removed.
The floor area where the refrigerator sits was so sloped that Mr. College Rental built a small platform to level it out so a refrigerator could sit level.
The floor clearly had layers of old linoleum. The top layer was ripped in several places. Mr. College Rental removed 3 layers of vinyl flooring with ¼ inch underlayment between each one. At the bottom he discovered a beautiful hardwood floor that he refinished. Another win! This way we saved on buying kitchen flooring and paying someone to install it!
Mr. College Rental restored house #4 to a cozy, beautiful house that our college students were super happy to have. We spent about $13,000 out of pocket on the repairs.
What Does It Cash Flow?
Here are the nitty gritty details. I combine both houses because they are taxed together. Together, the monthly cash flow is $684! Definitely our best deal yet! That’s a 26% return on our cash repairs and down payment (which we actually didn’t spend on cash because we leveraged another property for the down payment).
Have you had a buy one get one free experience? If so, please share it with us in the comments below.