Rental House #32 – Our First House that Floods

June 2016

Hey Stealthies,  we hope you had a great 4th of July. I know we did. We spent it with friends and family eating good food and blowing stuff up.   It’s time to get back at it, and part of that means documenting our ever-evolving road to wealth.  Here’s house #32 that we found through a  wholesaler. When you see the word wholesaler, think the “We Buy Ugly Houses” guys. These are professionals that go around all day and find people that want to sell their homes. The wholesalers get the house under contract with no intention of actually buying it, and during the contract period, they try to find another buyer who will pay “more.” They then assign the purchase contract to the new buyer and take an “assignment” fee. Some wholesalers do quite well financially, but my problem with the business is that you always have to be finding the “next” deal to be able to make money. They have no recurring revenue or appreciation from held real estate on which to rely.

4015 Thin Chromed Derivatives – Rental House #32

This property was a three-bedroom, two-bath house with about 1,500 square feet constructed in 1982. It was on a quiet street in Spring, TX, right in the heart of our “Farm.” Dave and I went over to see the house before we pulled the trigger with the wholesaler. The owner was there in the middle of moving out; we told her we were the “inspectors.” It was all original 80’s finishes, but it also had potential, especially at the price we were paying. The home’s siding along the back had all been replaced with aluminum siding. This investment would be our first house with that type of exterior.

Acquisition Process

We purchased this home for $72,000, which also included a $3,000 assignment fee for the wholesaler. See HUD Below. Luckily, we had our line of credit ready to go from BBVA, so we tapped it for about $90,000 and bought the house and used the rest for rehab.

HUD from Rental House #32

First Rehab

We replaced the floors, as they were shot to pieces and foreshadowing an issue we weren’t expecting. We also painted the place and repaired a few other odds and ends. The home had old laminate floors that had experienced all kinds of water damage.

Here are all our holding/stabilization costs after rehab.

Expense Line Item	Amount
Rehab 1st Installment	$7500
Paint	$125.11
Range	$437.64
Yard	$60
Utilities	$226.12
LOC Payment	$633.01
Garage Door	$300
Make Ready Clean	$135
HVAC	$2600
Total	$12,016.88

First Renter

We got the place rented immediately for $1,250 a month.

That’s a rent to price ratio of (1,250 / (75,000 purchase+12,000 rehab)) =  1.43% FRIGGIN AWESOME!

However, that’s where the awesomeness ends. This tenant was rough. Almost immediately, they had trouble paying rent. Dave had to hound them every month, but they eventually would pay.  The wife was a school teacher, but the husband never had a job and instead sat home and played video games all day. This relationship continued for several years and was annoying to manage. This situation again confirms our theory that 5% of your tenants take 95% of your time if you are self-managing.

To add insult to injury, anytime Houston got a big rainstorm, this house flooded in the back yard, and water made its way in through the back wall and back door. We had to replace the carpet in the back bedroom a couple of times and finally replaced it with LVP. It was only ever an inch of water in the back few feet of the house but enough to be annoying.  Finally, we figured out about french drains, so we spent about $1,750 to put in a full drainage system around the back of the house, which quickly took the water to the front of the house and out to the street so that the water wouldn’t pool behind the house. Best money ever spent.

Refinance of Home

Once we had a tenant in place, albeit a troublesome one, we called our favorite small regional bank and told our banker we want a loan. Here’s an example of that conversation.

The Stealthy Rich: “Hi, favorite banker, we’ve got a new property for you that we’d like to finance. It currently does not have a loan.”

Banker: “Great, how much would you like to finance, and what kind of property is it?”

The Stealthy Rich: “It’s a single-family residence in a subdivision built in 1982 with central HVAC. Here’s the address. We’d like to get $80,000 subject to your appraisal.”

Banker: “Ok, we will get right on it and hope to close in 3 weeks.”

Here’s the HUD from the REFI to see the $80,000 coming back to us. The bank will loan up to 80% in value, which shows the bank thought this house was valued at $100,000 at least. This new loan means we only have about $7000 in this house. If we average $200 a month in pure cash flow, that’s $2,400 a year which means our return on investment is 2,400/ 7000 = 29%

Second Renter

The one benefit from COVID was that this tenant left suddenly at the end of April. Hallelujah!  We spent a bit to clean up the place and paint it and remove some overgrown trees and branches. Now it’s renting for $1,299 with a less needy tenant. Happy times. Here are the costs associated with the second more minor rehab.

Expense Item	Amount
Yard	$260
Junk	$475
Rehab\Make Ready	$1000
Pictures	$124.99
Trees	$925

Rental House #32 Pics

Rental Real Estate Recap

This property has been a solid house for us, even with the flooding. So far, even with all the rehab as of June 2020, it has performed as follows:

• $5,800 in pure profit
• $10,000 in principal paydown
• $60,000 in equity

Net Worth Update

Stay tuned for House #33, where we snag one of our rare two-story homes, AND we each hit the “One Million” in Net Worth milestone.