We are currently in the process of buying our 3rd rental property. I don’t want to count my chickens before they hatch, but after talking to the seller, who happens to be another investor, I feel good about this one.
As usual we are buying the property in all cash, and we plan to do the repairs in all cash as well.
Before I tell you the total purchase price (purchase price + repairs) and the estimated rent, I will give you a detailed breakdown of the property.
Hey, since I’m no longer an anonymous blogger I feel compelled to let you in on my real estate dealings. Mrs. YFS has me on a gag order for our personal income, but she is fine with me telling you real estate related stuff, so let me strike while the iron is hot!
Wanna hear it? Here it goes!
County Assessed Value: $43,400
Year Built: 1920
Exterior Wall Type: Aluminum/Vinyl
No. Stories: 2
Living Area: 1820 sqft
The absolute best thing about this property is that my current property manager/construction manager was already working on the renovations with the current owner. The guy did a ton of work to the property, and all we have left to do is the following repairs.
1. Remove old linoleum from bathroom floor and re-install new linoleum tiles. ($265.00)
2. Install a used neo-angled vanity and sink. ($250.00)
3. Replace 4 interior doors that are cracked/no longer close. ($375.00)
4. Paint entire interior of house with 2 coats of latex paint. ($2,650.00)
5. Remove trees growing into the foundation. ($180.00)
6. Cut back large branches that are extending onto the house. ($375.00)
7. Install new side-slider window in kitchen. ($425.00)
8. Paint front porch. ($350.00)
9. Install new locks/dead bolt sets and master-key them. ($55.00)
10. Have all carpets cleaned. ($525.00)
Total cost for materials and labor: $5,450.00
Time frame for completion of work: 7-10 days
So that we are not caught by surprise like we were with our 2nd property, we are also going to set aside $2000 for any sewer issues.
As a landlord you must use purchase price + repairs to figure your total cost. With that said, the purchase price of this property is $30,000.
Repairs will cost us $7,450.00 (needed repairs + estimated repairs).
Leaving us with an out of pocket cost of $37,450.
Now, this is roughly $7000 more than what we usually pay for properties, and Mrs. YFS and I thought hard about passing this one up until my property manager told us something.
Estimated Section 8 Rental Income
He spoke with Section 8 concerning another property that we were going to purchase, and they gave him a rough estimate of what he could expect in rent. The numbers were between $900-$1200.
I’m all over that! Even though the numbers look good, I did try my hand at talking the owner down to no avail. He came down from 34k to 30k only. Not bad negotiating when you consider the potential rental income is out of this world.
Last but not least…
Getting my money out. I found a loophole in the equity loan process of my local credit union. Who said credit unions were smarter than banks? Anyway, my credit union, which is in the D.C. area, has several methods in which they assess a property to determine if they will loan you the money.
Just in case you were wondering. We are getting a 12 year interest only equity loan at 4.75%. We plan on getting as many homes as this broken system allows us to get and then paying the loans off in years 10 and 11. The equity loans cost us roughly $130 a month each for property 1 and 2.
Even if our units weren’t rented out, with our income (you know, the one my wife won’t let me disclose) we can cover 30+ properties… easily. So, before you jump on me saying, “oh no, debt, leverage, debt, oh no.” We have thought about the worst case scenario. :-)
Method 1: Normal Appraisal…Zzzz… (slow and risky)
This is the typical assessment method where an appraiser comes to your home, looks around, compares local home sales and then provides a value for your home based on the neighborhood and a physical inspection.
I’m sure you all are fully aware of this method. It would be great in my instance except it takes so damn long, and there is a possibility where an appraiser will get overzealous and site something that isn’t true like they did in property 1, but that’s another blog post.
Under this method I can pull 80% of the equity.
Method 2: “We take the tax assessed value!” but no soup for you
Now, this method is great too! I avoid an actual appraiser coming to my newly purchased and fixed up home and just get the tax assessment. Boom! Instant equity baby (Dick Vitale voice). This method is lightning fast, and I can get my money out within 1 month of purchasing the property.
I would go for this if it was available to me. Unfortunately, the county where we buy properties is not on the approved list.
Under this method I can pull 75% of the equity.
Method 3: My Favorite
My credit union has this thing called “AVM.” To be honest I do not know what the acronym means, I just know it means I can have my cash out within 2 weeks.
This method is my credit union’s lazy ass way of doing an appraisal. I think it’s a combo of tax records and recent purchase prices put into a computer algorithm that spits out a bullshit value for your property. On property 1 & 2 the AVM came back 10k higher than the tax assessment.
The only bad thing about this method is that we can only pull out 60% of the equity.
So… what do I expect the AVM to be?
I’m expecting roughly 55k for the AVM. This will allow me to pull enough equity to bank roll property #4, which we’ve already identified.
Update: The bank came bank and said they will give us 30k in equity if we go with method 3. Not bad! So, when it is all said and done we are coming out of pocket 7,450. Our cash on cash return is off the charts!
Call to action!
Would you buy this property? Leave a comment specifying why or why not.