The story of my third rental property in Alabama
A while ago, I met a fellow military member who owned six rental properties that he acquired over two years. I had him explain how he did it, and decided I would do it too!
I bought house #1 in cash for $30,000. It needed a lot of work and was quite the challenge to remodel (This is an understatement).
I bought house #2 in cash for $45,000, but this one was move-in ready! Didn’t even have to vacuum. Way easier.
How did I get an awesome deal on these and house #3??
It takes a certain personality to do this. I was uncomfortable doing it at the beginning.
Truth be told, still am today. But it’s essential.
Luckily, my wife has no problem doing this:
The secret is:
Making low, low offers, and lots of them!!!
If I was uncomfortable doing this, how did I get it done??
It was my wife. She’s Chinese. She knows money. She’s not ashamed or embarrassed to make low, low offers. These offers piss off our real estate agent. They piss off the average sellers as well.
This is how you find great deals. Make the low offers. Look for someone who is desperate to sell for some reason.
You have to find a real estate agent that doesn’t mind you making multiple low offers. If they try to talk you out of it, or give you too much grief, gonna have to find a new agent!!!!
I’ve fired many a’ agent. Make sure you’re happy with yours. They are making a lot of money off you!
My agent might have been annoyed at first, but once they see you get a few good deals, and they get their commission, you eventually win them over.
After I spent a few months looking at many, many houses and purchased my first two rental properties, I gained some valuable experience. I worked out how to estimate what it would cost to get houses ready-to-rent based on their condition, and started making low, low offers.
These low offers were made using the 50% rule and the 1% rule to estimate at least a 20% cap rate.
See my post on doing these calculations.
I made the offers so low, that I didn’t expect to hear back on 95% of them. If I heard a reasonable counter-offer or, in some rare cases, an acceptance of my offer, I would put much more time and effort into researching what was wrong with the house and negotiating a lower price.
What happened with house #3 was interesting.
The property was listed for $59,000. I did some quick math and decided that if I bought it for $35,000, I could make 20%+ a year on the property, so I made the offer.
Our real estate agent wrote this offer off as I waste of time. I’ll admit, I did too. We were busy making other offers and getting ready to close on our second house. Out of the blue, our real estate agent got a phone call saying they accepted our offer!
Again, it was one of those ideal situations where someone inherited the house from a family member who had recently passed away. The house was in rough shape and the owners were out of state. It was a thorn in their side!!!
That’s where I come in!!!
The house was in rough shape, but it was in a great neighborhood and had fantastic potential. At that price, I could put quite a bit into the property, and still be sitting pretty.
It was $24,000 below asking price! A 40% discount!!
Some of the problems (let’s not use this word) challenges for this house:
- Smokers smoked in this house their whole life, wreaked of smoke, walls and ceiling stained with tar
- Walls had tons of nail holes, has to be filled before painting
- Needed ceiling fans (this is a must for each room in Alabama)
- Kitchen nasty, nasty with tons of rat crap behind appliances
- Needed new countertops, need to paint cabinets
- Need to replace tile in kitchen
- Remove disgusting carpet and sand, wax hardwood floor underneath
- Some holes in walls, lots of plumbing problems
Painting the house was a big part of this project because of the nail holes, amount of smoking tar, and the strong smoking smell. We hired someone to do it cheap, but he was tough to manage. He made lots of excuses and worked too slow. Lessons learned:
We paid him too much upfront. Agree to buy his supplies as needed, but don’t pay for the job til’ he’s done. This is his incentive to get it done quick.
If you pay him too much upfront, he has no incentive to get it done soon. He can take other jobs and he’ll put his priority on those. You want to make sure YOUR job is his priority.
This was really quite a headache. In the future, I’ll let my management company handle the painting. It ends up being roughly the same price, and I don’t have to play supervisor/babysitter.
Rich on Money’s Naked Numbers
Purchase Price: $35,000
Closing costs: $482
Acquisition price: $39,732
We rented it out for: $850 a month / $10,200 a year
Projected vacancies of 10% $1,020
Projected maintenance of 10% $1,020
Property manager’s fee of 10% $1,020
Operating expenses: $3,964
Gross rents: $10,200
Operating expenses – $ 3,964
Net Yearly Income $ 6,236
Divide net yearly income by acquisition cost:
6,236/39,732 = 15.6% Cap Rate
This is my cap rate!!! It’s the return on investment I get for owning this property.
Don’t forget to add 3% a year for appreciation.
With appreciation, this investment makes about 18.6% per year!
I really appreciate that!
That’s an amazing investment!
But it’s not always rosy and perfect. Murphy sometimes creeps in and you have an unusual, unexpected expense or two.
I got a complaint of noises in the attic at night on this property.
Turns out there were raccoons living in the attic. I had to spend $1000 to make sure the small entrances to the attic were all closed. I spent $400 to trap and remove two raccoons. I spent $70 a month for six months to monitor and ensure they didn’t go back in.
That’s house #3. Overall, it’s been a great investment. If I can keep finding deals like this, I’ll have a great, early retirement.
So will I?
Why do I insist on paying cash for every property I have? (Many now)
Click here to find out.
Rich on Money