We are buying another rental property #3

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!

 

Property Details

 

County Assessed Value: $43,400

Year Built: 1920

Exterior Wall Type: Aluminum/Vinyl

No. Stories: 2

Living Area: 1820 sqft

Bedroom: 4

Bathrooms: 2

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.

 

Repairs Needed

 

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.

 

Total Cost:

 

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.

Wow!

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.

 

If you want more information about my deal check out my one on one real estate sessions by clicking this link

Comments

  1. You sound like you've done some research in the area. :)
    I"ll ask.

    BTW,
    I can't see more than 1 reply per comment. Don't know if it's something on your end or my browser (IE 9). I had to view thw source to see your reply.

  2. Congrats on this purchase! I found your site just yesterday – and I'm loving it! I really like how you break down your rental analyses. We became landlords recently (we're also in the NoVa area) by renting out our old house when we bought a new one in a better school system for our son. It's working out well so far (we're managing it ourselves since we're pretty handy), and I was looking for another property in the area to buy, but I'm thinking that you may have persuaded me that your method is much better (buying cheap in another town that gets great a great cap rate!). Money doesn't go very far around here! We could buy just one more house here with the money we have, but multiple houses at the prices you're speaking of. I would be interested in a post on how you got into Section 8 housing. It's quite intriguing. Also on how you found your property manager. :) He sounds like he's worth his weight in gold!

    Thanks,

    Amy

    • URFinanceSimple says:

      Hello neighbor! I'm in NoVA also, what part are you in? I'm near Fairfax. Section 8 is easy you just have to put your house on the list. The hard part is screening the tenants and passing all the inspections, you have to pass the Section 8 requirements. I found my property manager via a referral from my lawyer. Work those referrals :-)

      • We live in McLean now, our rental is in Annandale. My husband has a client (he flies charter as a side gig) who has done extremely well with Section 8 in D.C.. This client's son bought two properties, one in Manassas, and one in Woodbridge, that have done well as rentals. I was thinking of buying in Manassas or Woodbridge for Section 8, since the housing is a lot cheaper. Our house in Annandale wouldn't work, it's been upgraded (we did it for ourselves when we were living there), so we get a premium in rent for it. I'm also in the process of getting my real estate license to save some money on rental purchases. Okay, I'll have to ask around for property managers!

  3. Nice work mate, you have obviously done your homework. My last rental cost me over 300k, wish they were a bit more affordable in Australia!

    • URFinanceSimple says:

      Ok so you paid 300K, what is the cap rate and NOI? Do you get much appreciation?

  4. On the sewer stuff, you can get a plumber to snake a camera down if you aren't too far along in the process. $250, inflated Bay Area rate over here. (We were afraid about root penetration in our 70s era home. Clean!)

    You're making the Bay Area look silly – the cheapest stuff around me sells for maybe 145x rent, while you're talking 31 – 42x. I'd be all over that in a second; I think you've got a good one.

    • The only thing that sucks is we have 0 appreciation on the homes. I will make all my money via rents and social programs. I guess I can't complain too much, the rental income will make up for not getting much appreciation if we ever sell.

  5. I own a rental property in which I live in also. I did an FHA loan to obtain the property. The rents give me a $200 postive cash flow out and above the mortgage. I have been there for almost a year, and would like to purchase another property.

  6. I have 2 rental properties with the same bank. I'm thinking to foreclose in one of them and keep the other for longer.How does it effect my second rental property and more importantly, does it effect my primary residential property or my bank accounts?

    • It won't effect any of your properties or bank accounts. But your credit will be ruined! Any time you apply for credit for future homes they will ask if you ever had a foreclosure. Which, might prevent you from getting other loans.

      Why do you want to foreclose on the rental?

  7. This has to be one of my favorite posts! And on top of thats its also very helpful topic for newbies. Thanks a lot for informative information!

    DIY radiant barrier

  8. You have a great system which is well thought out. Congrats on getting the third property under your belt.

  9. The rental income trumps the equity loan amount by 800%

  10. What are the politics on section 8? Any chance with budget issues that Congress would change the rules or do a tighter voucher system re what amount of rent they pay? It sounds like you would be ok if you had to rent it in a "real world" scenario, but certainly may not hit those same numbers.

    • Even if they did switch to a tighter budget system the rents in the area won't decrease. The reason rents are high is relative to purchase price is because banks have limits on the loans they provide and the people who rent from me have serious credit issues. Section 8 is just icing. With banks not providing loans with favorable interest rates for 40k properties it puts people who have no discipline and bad credit in a bind… meaning they usually rent. This is the void I fill.

  11. Nice work. The only worry I have while reading your story is this: if the other guy was an investor, why did he want out so badly?

    And BTW, "I could only talk him down from $34k to $30k…." that's over 12 percent! What do you mean you couldn't talk him down?!?

    • The guy wanted out because he purchased the home at auction for 12k. He is also about 20 properties in and is about to go into heart surgery. He doesn't have the time nor the money to finish the rehab of the property. So, he figures he might as well get out with a few bucks while he can.

  12. Excuse me while I let my jaw sit on my desk right now…this is incredible! I really would love to know more about how you do this and the whole Section 8 thing, too. I'm considering purchasing some properties back in my home town over the next 1-3 years, and I'd love to go this route. Kudos!

    • Well I will tell you it depends on what you want out of your investment properties. I only look for rental income as the determining factor if I would buy a house or not. Some people want the home to appreciate and sell later. I only focus on cashflow and cashflow only. As far as section 8 goes, it depends on your area. Call your local HUD office, they should point you in the right direction.

  13. Where do you find these properties that costs $50k and rent out for $1200? That's incredible.

    • There are tons of areas who offer similar deals. It all depends on the local economy you're investing in. I will say this area is a perfect storm of government assistance and low paying jobs mixed with people who bad credit.

  14. That's an incredible ROI you're getting on these properties. If I'm ever back in the States I need to have a chat with you about how the heck you do this. Congrats in advance on property #3 and here's to the march to 30!

    • The best thing about my properties is that I'm 540 miles away. I do all this remotely and spend roughly 30 minutes a month managing the whole system. So, technically you could do this from tailand :-). Funny you say march to 30. My wife and I was talking last night and we mapped out a plan to have 19 properties by 2019.

  15. Wow, great work! Hope #3 goes well!

    • Thank you for the well wishes. It should go well, we are getting better and better at identifying properties.

  16. I think you would get great return from your investment in a few years to come.

  17. I think that's great. Where are these properties? I assume they are all in the same area and being managed by one property manager. Your out of pocket is really good on this property. I'd say go for it while the rate is still reasonable.

    • Joe, all these properties are in the same area and managed by my new property manager. We are moving forward with the process as planned. We hope to pick up one more before 2012 ends as well. Bringing our total to 4 rental properties. By the end of 2013 we should add 3 more properties bringing our total to 7.

  18. I'll applaud your aggressiveness, but worry about the leverage and total reliance on main job income. What happens if personal income takes a hit due to a job loss and you are without tentants for awhile? Obviously, theres no reward if zero risk is taken, but what is the exit stategy if something goes not according to plan.

    • Ahh.. see I thought of this scenario too. This is the reason why I have section 8 tenants and single family homes. The average section 8 tenant in the area I invest in stays in the home for 8+ years. Having a clean and always fixed single family home can stretch this to 10+ years.

      If my wife and I both lose our jobs today this process still works! Why? Well, the houses pay for their selves. See my February blog income update for a bit more info on the margins.

      The only thing that can hurt me is a perfect storm occurs.

      What is a perfect storm? Well it's us both losing our jobs and not finding employment for 5 years and all properties are vacant for 5 years. Is it possible? Yes! Is it probably? Hell no!

      Why?

      Well I can go get high paying job within 2 days if I wanted too. I've picked the right area, the right job market and have the right skills to make this happen. If I'm really pressed for cash I can pick up 2 of them and work day / night shift. My wife can do the same if needed.

      The exit strategy, is the same in any real estate transaction. Put the home up for sale and wait it out. The good thing is because of the aforementioned reason I will never have to use my exit strategy (unless a perfect storm happens)

  19. Alyce Williams says:

    Wow Dom!! I could hardly follow all of this legal jargon and what not, but this sounds like a winner and you make it seem so easy!!!! Soon as I get my teaching position secured I need you to help me in my success by 30 plan :)

    Proud of the Browns

    • Thanks twin, it's not that complicated once you've done deal 1. As far as the plan by 30, you have my contact information. Get in touch with me when you're ready.

  20. I don't know how you are doing it, but this just sounds too good to be true. With your unknown salary, it sounds like you have a lot of security, so I say keep building up the passive income! Nice work!

    • hahah.. Thanks Corey! The game plan is to keep building the passive income streams. Need to take advantage of the real estate market while I can. Honestly, I take the "Too good to be true" thing as a compliment :-). I took a lot of time analyzing this process and trying to find a wrinkle in the plan. 2 years or research is finally paying off.

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  1. fwisp.com says:

    We are buying another rental property #3…

    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…

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