How I Bought a Rental Property With Cash and Without a Clue

After moving back to the USA from Japan in 2012, I started a new job in Alabama.  I met a fellow military member who shared my passion for real estate.  Meeting him had a profound effect on my life financially.

What he did with real estate is exactly what I wanted to do.

And he was wildly successful.

His Background

When I met him, he had been living there for two years.  In that time, he purchased four houses with cash, remodeled them mostly on his own, and rented them out providing substantial cash flow each month (especially without a mortgage!)

He bought in the range of $25-35k, putting a few thousand and sweat equity into them, then renting them out for around $750 a month.  The numbers were REALLY working for him.

If you apply the 1% rule to these properties, a house that totaled $40k in cost to rent out should pull in $40o to be “worth it.”

These were almost double that.

Let’s call this successful investor I met Bob.

 

He handed me on a silver platter almost everything I needed to get started in rental property investing in a new city.

cash money served on a silver tray

Mainly, he provided:

  • a property manager
  • a real estate agent
  • a list of good contractors
  • a sense of where to buy and where to avoid
  • himself as a trusted advisor

Knowing I could lean on him if I got stuck, I decided to try my hand at buying a property for cash, fixing it up, and renting it out.

My Road to Purchase

The real estate agent I used was recommended by Bob and the management company. She helped the management company purchase most of their properties (several hundred).  She knew exactly what kind of houses and in what areas the management company liked.

This is golden.  Buying in the wrong neighborhood, getting a house that your management company doesn’t like, or a house that doesn’t rent well can cost you a lot of money!

I asked the management company for advice on what to buy.  Their most important advice to me:

  • Single family homes rent best.
  • Most sought after is 3 bed/2 bath.  Less than 2 baths rent much slower.
  • Let the management company look at the house before I buy it. (I neglected to do so on this house, but always did after that!)

I found a 3 bed / 2 bath 1700 sq ft house on a big piece of land with a detached garage and workshop.  It was listed for $55,000.  It was a major fixer-upper.

front house ex

The Punch List

Here’s the list of things I needed to fix (that I knew about)

  • exterior – several locations with rotting, soft wood
  • damage to floor under bathrooms from water
  • A/C and heater not working
  • roof over add-on room needs replacement
  • separate garage and workshop has damaged garage door, rotting wood, and is full of junk
  • numerous electrical and plumbing issues
  • carpet disgusting
  • hard wood below carpet has staples and glue as well as numerous stains in most rooms from cat pee (thanks, cat lady!)
  • house smells like piss (thanks, cat lady!)
  • several locations on walls and ceiling had holes, needed patching/painting

cat lady

I used several different contractors and inspectors to get a ballpark idea what it would cost to fix everything.  It was my first property, so I wanted to overestimate.

I made a list of stuff to be fixed and wrote a high estimate next to it.  Came out to $15k.  I had to get a good enough deal of the house to account for an extra $15k to get it move-in ready.

The house was listed for $55,000.  I offered $30k.

They accepted!

Whoops!

What does this tell you?

I didn’t offer low enough!!!!!!!

Bargaining 101!!!!!!

If they accept your first offer, you lose. Your initial bid wasn’t low enough.  You need to go lower than you imagine possible, and then work your way slowly up to a number you both can live with!!!!

Rich on Money

The inspection I mentioned earlier happened after they accepted my initial offer. This is common practice.

Make sure you use this tactic when you buy a property

  • agree on a purchase price
  • get an inspection
  • re-negotiate based on what you find

This gives me the opportunity to bring up deficiencies that are harder to find, and negotiate an even lower price.  I was a rookie and didn’t do so on this property.   Could’ve easily knocked $5k off, maybe more.

Live and learn.

Surprise, Surprise

Due to lack of experience, getting the house fixed up was a slow and painful process.  I had one major surprise I didn’t find until AFTER I bought the house.

I went into the add-on room and started cleaning a pile of trash in the middle of the room.  What was under the trash?

After removing the seemingly randomly placed trash, I realized the floor under the trash was pushed up about 1 1/2 feet into the air.  Something under the carpet had forced the ground up and made a huge bump in the center of the room.  It was huge!  It totally shocked me!

shocked

  • Shocked me because I didn’t notice before I bought the house!
  • Shocked me that the inspector I paid didn’t notice it either!

It was clear the trash in the room was meant to disguise the bump from the naïve purchaser (me).

BUT you’d have to be a real MORON to miss something that obvious!!!! (me)

(and my inspector who I never used again)

Buyer Beware!!!

Over the course of a month, I brought probably a dozen different contractors over trying to figure out how to fix it and how much it would cost.  Some estimated as high as $4,000-$5,000 to fix, but nobody was sure what was wrong!

I lost sleep nights thinking about this.  I obsessed about it!  I vowed to never buy a house again!

What if:

  • the ground was shifting?
  • the house was falling into a sinkhole?
  • It was an ancient Indian burial ground?
  • It was caused by water pressure?
  • It was Pokemon’s hiding place?

I had no idea!!!!

Finally one day, a concrete guy just took out a sledgehammer, smashed the ground, moved some concrete out of the way, and what did he find!!!!

A tree root! About four inches in diameter.  Damn, I wish I took pictures of that thing!

He sledgehammered the concrete away, removed the root, and repoured concrete in the room.  Cost:  $1200.  Could have been much worse!!!

I had a state farm agent come by the house and give me a list of things to fix before he would insure it.  One thing I didn’t realize the danger of was the fire pit built out of bricks about 6 feet from the house.

house fire illustration_1

Bad idea!  Found someone to smash it up with a sledgehammer and haul it away for $100.

The Floors!!

I was floored by how bad the floors looked!

The piss stunk to high heaven and the hardwood floors looked like hell.  They also had glue and staples all over them from having carpet tacked to it over the years.

dogpee ex

The price to sand everything down, stain it, and wax it: $2900.

It looked like brand new when they were done, but I way overpaid for this.

It’s like putting a massive crystal chandelier in a college dorm room. Nobody appreciates it or expects it to be that nice!!

Could have rented the machine and did it myself, or found a handyman to do it for me waaaaayyy less.

That being said, they did a good job on the stains. You can’t tell how nasty it was before. And the smell was GONE!

Replace Bathtub?

Bathtub was stained, chipped, and nasty.  Couldn’t clean it.  Stains wouldn’t come out.

nastybath ex

Never knew this was possible, but they sprayed on new porcelain over the old stuff, turned out looking brand new.  Cost?  $99.85.

Quick summary of some of the other big ticket items

Partial roof replacement:     $1550

Plumbing:                                $1050

Electrician:                               $1045

Carpet:                                      $790

Garage and kitchen:               $2500

All in all, I put $13,683 into it.

The place rented out for $750 a month.  We were excited.

But there was one more surprise!!!!!

On the day the tenants moved in, I got a phone call saying the water wasn’t working in the house, and water was flooding into the front yard.

Sent my trusty plumber over to investigate.  He told me:

SOMEBODY HAD STOLEN ALL THE COPPER PIPES UNDER THE HOUSE WHILE IT WAS VACANT!!!

wtf chan

 

The water was running fine while we were remodeling, so this happened between remodeling and move-in.

Cost to totally redo plumbing with hose instead of copper: $1900.

I now had a rental property that cost me $44,800.  It was renting for $750.

Passes the 1% test with flying colors.  It’s a great rental giving me a positive cash flow.  The fact that there was no mortgage to pay makes it that much sweeter!!

I Love Not Having Mortgages!!

Cash flow is much harder to come by doing this with mortgages. Less room for mistakes, bad luck, and emergencies. Just keep that in mind.

Compared to Washington D.C., where I owned a $400k townhouse free and clear, this house was cheap.  I had the cash on hand to do it again, but was gun shy after dealing with all this craziness!

          Would I keep going?

Of course I would.

I love real estate.

And I figured if I could overcome these problems, I could do anything!

Four Important Lessons Learned

Why should you care about all the crap I went through to buy this house.

Because I learned a few things.  Maybe you’ll do better than I did on your first house!

1.  You need experts to look at the house before you buy it

I found a much better inspector for my future purchases.  I also learned to use a free inspection done by state farm and a free inspection done by the management company to avoid surprises in the future.

2.  Make lots of offers

I am now at the point where I make offers on almost every property that is a 3 bedroom 2 bath that hasn’t been condemned.  These are low, low offers.

No matter how bad a house is, if it’s cheap enough, you can make it work.

If no one got back to me on a low offer, I moved on.

If they came back with a half-way decent counter-offer, I knew they were desperate, and I put more effort into negotiations and inspections.

3.  The art of negotiation

If you don’t ask for a low enough number and they accept, you overpaid and you suck.

If you ask too low, you offend them, and you suck again. Also they don’t counter-offer.  Experience will help you find that sweet spot.

Once they accept an offer for lets say $35k, you get a professional inspection.  Forward them the results of the inspection, and deduct the cost of estimated repairs.  You could then counter-offer much less, say $28k based on the inspection.  They will negotiate and hopefully settle at a number that you both can live with.

Sometimes, you have to keep insisting on your lower price.  If they are desperate enough, they’ll take it.

Sometimes they’ll reject your cash offer and sell to someone else who is getting a loan, but offering more $$ than you.

Often enough, these loan deals will fall through because the buyer can’t get a loan, and you’ll see it on the market again a month later. (This happens all the time)

At this point, I come in with a lower cash offer than I made originally, and they usually take it. By now, they are pissed and just want to be rid of the damn thing!

4.  Some sellers aren’t prime yet

Sometimes, sellers haven’t had the house on the market long, and still think they’re going to get a fortune for their house.  You don’t need to waste time on these people.

Wait until their house has spent several months on the market and they’ve been forced to lower their price a few times. Maybe wait until they’ve had an offer fall through. Then you move in for the kill!

Now that my house was rented out and bringing in money, I forgot about all the heartache and pain that went into remodeling.  I wanted a second house.  I even knew I wanted a third.

I liked the idea of all that passive income with no debt!

I had the cash, so I started making offers again.  My goal was to catch up with my friend, who already had four properties.

But that’s a story for another day…

 

Click here to read about my 2nd buy and hold property. (much better)

Rich on Money

I’m happy to answer your questions by comment or email.   Been waiting to pull the trigger on buying a property?  Have questions about getting ready to buy?  I’m here to help.

Ask away.

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3 Comments

  1. Paul

    As someone who’s always been slightly interested in real estate investing but who’s always thought that it would take $120K+ to buy a nice-enough-to-rent-out house for cash, you’ve expanded my horizons with the fact you purchased and fixed up a house for under $45K. I can’t wait to read future posts about your 2nd, 3rd, etc purchases. Did you buy them for roughly the same amount?

    • Paul,

      thanks for commenting! I bought my first six that first year for about $45-50K ready to rent. When I decided to keep buying the following years and up until current day, i ended up paying more like $55-60k all said and done, but still pretty damn good!!

      • Paul

        Wow…you bought six houses, rehabbed them and started renting them out in your first year? Very impressive. Can’t wait for more posts.

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