Rental House #4 – 2434 Erased Diva – How To Get a Free Rental Property!

September 2013

We have now purchased three houses, and we have them rented with tenants who pay on time, and they haven’t burned down.  We consider that a massive success. Now we think we are ready to take over the world! My buddy, D, calls me one day and says,

“We’ve got to expand this real estate empire, and we need to be more efficient.”

We had to be more careful about what we bought. While we did not overpay for any houses yet in our estimation, we had not gotten a killer deal yet either. I don’t think we were ready for the work that those types of properties would’ve required nor had we found the back channels where these deals exist.  This barrier was primarily because we only bought our deals off the MLS. “D” and I decided that we were the most involved and committed (and crazy) of the 5 of our initial investors. Therefore, we decided to split off from the other three investors to buy more “creative” properties since we were doing all the work.

“D” found 2434 Erased Diva (address changed to keep us stealthy). This home was listed on the MLS, but unlike our first three deals, this home had a significant defect. The owner had gotten a bid for $25,000 to fix a damaged foundation. In Texas, there’s significant shifting sometimes due to clay and other unstable soils. This shifting can wreak havoc on slabs and cause cracks and settling. Most of the time these issues are just cosmetic and fairly normal. However, when I viewed the home, the problem was significant as doors didn’t close, and there were large cracks in the walls.  This problem worried me because all of our other properties were move-in ready or they just needed cosmetic fixes. However, “D” convinced me to look past this issue and we made an offer.

Rental Property Offer

We offered $49,000 on this house. It was about 1500 sqft and had three bedrooms two baths just like all our former properties. The sellers accepted our offer, and we closed in September 2013. We paid cash for this one, half from me, and the other half from “D.”

Rental House Rehab Process

We jumped right in and found some contractors to do the foundation. Instead of $25,000 we got a bid from a trustworthy source for $5,000. This whole process was amazing to watch. They put in almost 30 piers into the foundation and raised the back corner of the home 12 inches! They had to cut two 3 x 3-foot holes inside the house and insert piers as well. There’s nothing like seeing a 2-foot pile of dirt in the middle of your newly purchased living room. I was doing all of this on faith, having put in most of mine and my partner’s cash reserves to buy this place.

Once we lifted the back corner of the house 12 inches, it raised the power meter 12 inches as it was mounted on the side of the house. That action physically ripped the meter off the primary power source coming out of the ground causing an immediate shut off from the power company. It created quite a mess. We had to spend about $1500 bucks to repair the line, and while we were at it, we replaced the 30-year-old breaker box as well. After the job was finished now all the doors magically shut and the cracks in the walls were small enough that they could be touched up and painted.

We then painted the whole place using flat paint which I now don’t recommend. We thought it would be easier to touch up in the future, but it, in the end, flat paint shows all stains and wear and doesn’t clean easily. Do not use flat paint, ever! In the future, we learned to use an eggshell finish which performs better and costs about $55 for 5 gallons at Home Depot. A typical house of ours takes 10 gallons to paint all the walls.

We also needed to redo all the floors since we had cut 3′ x 3′ holes into the slab all over the place. We put in tile throughout the living room, hallways, kitchen, and bathrooms, and then put carpet in all the bedrooms. These changes totaled about $3,600. We had a new floor guy, and he was great, but he chose the ugliest carpet, we should’ve intervened, but it was too late. Our guy now knows what color we want and it never happens again.

Also, our stupid insurance company made us replace the roof. That was about $5,300. We learn very quickly from this racket that the roof was normal, but the insurance company wanted it replaced to mitigate their risk. It takes a few houses to figure out this game. However, eventually, we find another carrier that isn’t so upset about old roofs.

All in all, we spent $20,600 on the rehab of this house, putting us all in at around $69,000. This place will rent for 1100 which puts this deal at a stable 1.6 rent to purchase price initially.

Magic House Financing Time!

We have this beautiful house, but we have 69k of our cash into it.

How do we get it out?

How do we get a loan?

If we refi it, we probably can only get about 80% of our 69k out. We had to get creative. How could we get ALL of our money out of this house?

Well, you sell it to your buddy, of course.

Now I’m still not quite sure how this worked, but our CPA bought off on it, so that’s good enough for me.

1. “D” bought the house in his name. So on paper, he is the sole owner. After we rehabbed it, it’s now worth a good deal more as a functioning rental property.
2. “D” sells the house to me. We agree on a “fair” price. In this case, it’s $95,500
3. The house appraised just fine at $95,500. I did a 30 year fixed conventional loan at about 5.375%. This deal was my third Fannie “bullet.”
4. The Loan to Value Ratio is 75/25, so that means now we have a loan on the house for $71,625. This amount means we made about $2,500 bucks on this deal. We have a cash flowing house with none of our money in it!
5. We created a new LLC for just me and “D” and since he owned the house before I did, on paper in the LLC the house transaction shows as a refi, #Winning

Lessons Learned on Rental House #4

1. Flat paint is of the devil. Don’t use it! Use paint with an eggshell or satin finish
2. Foundation repairs are generally straightforward, and we found a guy who is very very affordable. I love him, cause he cost 20% of what the other bids we got.
3. House insurance is a game, a game we will try and have to win.
4. Buying a house at a discount is where you can really boost your net worth. You make all your money when you buy, not when you sell
5. Creative Financing is awesome. We have to try and figure out how to buy as many houses with as little money as possible.

On to the next deal!

Line Item Detail	Amount	Comment
Purchase Price	$49,000
Closing Costs	1000	First year of insurance, (we paid title policy on this one, also doc fees, and HOA transfers, etc.
Rehab Costs	19,000	Foundation repair, new roof, new power box, new paint, floors, tub surrounds
Total cost of deal	$69,000	Includes rehab
Anticipated Rent	$1,100
D sells the house to me to get all our cash back.	$95,500	Sales price to me. 75% LTV. This maneuver allowed us to get all our money back plus 2500 bucks.
Monthly Mortgage on new Conventional Loan	$401	Conventional Loan at %5.375. at $95,500
Anticipated monthly Expense	$200	Average of $2400 a year in expenses
Property Management	88
Taxes and insurance	$200
Monthly cash flow	$211	This does not include the principal paydown which is built into the loan
Rent to Purchase price Ratio	1.15%	Ratio is low, but we bootstrapped this house with none of our own cash

Net Worth Update

This house helped boost our net worth as we didn’t have any money in the house in the end and we weren’t splitting the increase five ways. We easily picked up 14k each on this deal.

 

 

 

 

 

 

 

 

 

See House #3

See House #5