I closed on rental property #4 in November of 2017. I am excited to share the details with you about this rental property. As you probably know by now, I love owning rental property and being a landlord.
The breakdown of rental property #4 will consist of three parts. I hope you can use this series, the Real Estate Corner and my Landlord Reports as your own a guide to owning rental property(s).
Part I covers:
- Finding the deal
- Analyzing the deal
- Why being patient in real estate pays off
- The offer to buy the property
Part II will cover:
- The inspection contingency
- The appraisal contingency
- The financing contingency & bank underwriting
- How I got the money for rental property #4
- The renovation budget
Part III will cover:
- The renovation (before & after pictures)
- Managing the rehab
- The curve-ball
- Leasing the property
- Reviewing my rental property business plan & analysis vs. actual returns
How I Bought My Rental Property #4: Part I
Finding the deal
The rental property is located in gentrifying neighborhood, close a metro station (4 blocks; 8-minute walk) and has three 1 bedroom apartments. This satisfies three of my biggest criteria when buying rental property.
First, I like neighborhoods that are in the early to middle stages of gentrifying. This typically means the neighborhood is heading in a good direction but not ‘fully arrived’.
A few bars and coffee shops have opened up in the neighborhood. Some of the older, run-down homes have been renovated. The neighborhood is still rough around the edges and has some crime.
There is a block long development a block away. The new building will have ground floor retail and over 100 apartments; currently its a big hole in the ground.
A local celebrity chef will be opening up a restaurant in the neighborhood. Conclusion, the neighborhood is in the early stages of gentrification.
Second, as I mentioned earlier, the property is a few blocks from a metro station. This means the area is very accessible. People living in Washington, D.C. generally like being close to the metro. Renters will generally pay more for the convenience of living next to a metro station.
Third, the building also has three units. I am a big fan of investing in duplex, triplexes, and quads. Having multiple units makes the property less volatile.
If you buy a single family home as a rental, its binary. You either have a renter or you do not. When you have two, three or four units – a vacancy is less painful.
I originally discovered rental property #4 back in March or April. This was shortly after I closed on rental property #3 and I did not have the cash to consider buying another property. Sadly, the property went under contract to another buyer (more on that later) and I lost out on a great deal. Or did I?
Analyzing the deal
There are three units at rental property #4. Each unit has one bedroom and one bathroom. The units are stacked on top of each other. The property has a small backyard and off-street parking behind the building.
All the units either have a washer/dryer or a hook-up to install a washer and dryer. Having a washer/dryer in each unit is great. Tenants won’t be dragging laundry to a common area, or worse, to a laundromat.
One of the units is in great shape. One of the units needs a bit of touch up. The last unit needs a lot of work (mostly cosmetic). The building has good bones and the structure is sound.
Assuming the building is renovated to the level needed to gain market rents, the property will generate great cash flow.
Based on the voucher rents for the neighborhood, the average one-bedroom apartment rents for $1,167/month. The entire building would rent for $3,501/month ($1,167 x 3 units = $3,501/month).
The offer to buy the property
The property was listed at $360,000 and went under contract a few weeks after I closed on rental property #3. The buyer who had the property under contract had their financing fall apart (they couldn’t get a loan).
The seller was fed-up with the buyer after extending the contract three times. After three extensions, the buyer still could not close on the deal.
The seller gave the buyer one last opportunity to buy the property. Meanwhile, the seller was also soliciting backup offers in case the buyer was unable to deliver. This is where I re-entered the picture.
Fortunately for me, the previous buyer was unable to deliver. I was one of a handful of individuals who submitted a ‘back-up’ offer to the listing agent.
I viewed this as a great rental property that was just below the 1% rule and worked under Coach Carson’s 50% rule. The property also met my 20% cash on cash return rule. As such, my offer was aggressive and reflected my desire to buy the rental property.
I offered the asking price of $360,000. I also had a $2,000 escalator up to $380,000. This means I was willing to beat any offer by $2,000 up to the amount of $380,000.
After reviewing all offers, the listing agent called my agent. The listing agent said that someone outbid me by $100. However, the seller liked my offer better.
The highest bidder was using a 203k FHA loan, which requires a low down payment and a long closing time. This type of buyer is less likely to close on their loan as well. Remember, I used a 203k FHA loan on rental property #2 (the fixer-upper), to buy and renovate the house. This type of loan takes much longer to close.
The seller was willing to accept my contract if I agreed to buy the place for my max offer of $380,000. After reviewing the competing offer, I was suspicious and believed the offer was fake.
The competing offer was dated and time stamped at 11:30 pm from the night before. I believe the seller or listing agent had a friend submit a fake contract. My agent shared the same sentiment.
It was fight or flight time. My offer was stronger. I would use conventional financing. I could have potentially pushed back and questioned the legitimacy of the competing offer.
I could counter and try negotiating a lower price.
However, my agent (and mentor) brought up a valid point. Is it worth losing the property over $5,000 or $10,000? Amortized over the next 20 or 30 years, that barely moves the needle. Even at the higher price, I would still have a good return on the rental property.
Do I swallow my pride and potentially overpay for the rental property? Or do I stick to my guns and negotiate the hell out of a deal like I normally do?
Sure it sucks to pay more than I need to. Believe me, I never want to pay a penny more than necessary. It sucks, even more, to lose out on a good deal. I have lost countless in the past…
Until next time.
Continue reading part II here.