Today at 2pm I closed on my 7th long term rental property! This home was listed on MLS as a short sale and I acted very fast to get my offer in first. This home was listed for $120,000 and I ended up buying it for $113,000 with the seller paying $2,000 in closing costs. This home is perfect for my long term rental strategy.
Details on the house
The house was built in 2001, has 5 bedrooms and 2 baths. The property has an attached 2 car garage, small deck, central air conditioning and a walk out basement. The home needs some work as you can see from the video here. I’m figuring on these costs for repairs on the home:
Interior paint $2,000
Exterior trim $500
Interior fixtures $750
Whenever I estimate repairs I always try to estimate high and leave plenty of room for extras that always seem to occur. Even though the house appears to not need very many repairs, the repairs always add up quickly.
Loan and finance details
I bought the house for $113,000 with the seller paying $2,000 in closing costs and since I am the buyers agent I will get my commission back which was $2,825. I went with a 5/30 adjustable Rate Mortgage(ARM) at 3.625% interest. My principal and interest payment is about $412 and with escrow for taxes and insurance my total payment is about $550. This home should rent for a minimum of $1,300 and I may be able to get $1,400 a month with tenants paying all utilities. After all was said and done at closing I shelled out $23,300 for the property.
After down payment, closing costs, commissions and repairs I will have about $34,500 cash into the property to get it ready to rent. That figure always seems so much higher when I put the figures to paper then when I do them in my head! I should have about $700 a month cash flow after the home is rented and that would equal a 24% cash on cash return based on $1,300 rent. That is baseline for my other properties which are all over 24% cash on cash return, but I think I can get $1,400 and that would equal 28%.
You may notice I am not including much buffer for vacancies or maintenance in my cash flow figure. In my experience I have had very little maintenance the first few years because I am fixing these properties up before I rent them. I don’t know if I have been lucky, good or it is our market but not one of my 6 other rentals have had a vacant month since I first rented them. Part of this may be because I choose very solid tenants and treat them right.
How I bought this property
The biggest issue most investors are running into right now is how to find good deals. This was a great deal, I am extremely happy with the numbers and the equity. This home is worth at least $155,000 fixed up and technically it has plenty of room built in to flip it if I wanted to. I am going to discuss in detail why I am keeping this as a long term rental instead of flipping it in my next article.
This was a short sale that was listed on MLS by another Realtor. I saw the home come up on my hot sheet one afternoon and I set up a showing and looked at it the same day it was listed. I saw the home and sent a text to my assistant to writeup an offer right away for 113k with 2k in closing costs. I sent in my offer that day with a copy of the earnest money check and my pre-qual letter. I talked to the listing agent, told him I was an investor and would buy the home as-is. I mentioned I have to get a loan, but my lender does not require repairs, only that the appraisal comes in at value. He was very receptive and said he would do his best to get the seller to sign the contract asap.
I was ecstatic, but I did not hear anything for a few days. I called the agent and he said the seller was out of town, but he still wanted to sign my offer. I waited a few more days and did not hear anything, I didn’t want to bug the agent so I patiently waited. A few days later he called and said good news, the seller is going to accept your offer! He then said “I think I told you, but we had multiple offers and some were higher than yours but we thought your offer has the best chance of closing”. He did not tell me they had other offers, in fact I was worried that they would call me and say they took another offer without giving me a chance to raise mine. I would have been willing to go up in price if they had told me they had other offers. Looking back on it I guess the other agent saved me some money by not telling me they had other offers and giving me a chance to raise up my price.
Overall it took about 30 days to get the short sale approved after my offer was accepted by the seller. That was thanks in part to it being a VA loan. VA has a very simple process for approving short sales. They order an appraisal and if the net price to them is within a certain percentage of the appraisal they accept it. Luckily the appraisal was low enough to get my offer approved at my offer price.
I am refinancing rental property number 3 in a couple weeks and I have secured a line of credit on my personal residence for $64,000. I had to pay taxes last week which is always an unpleasant experience, but I will have enough cash to buy at least one more property in the near future. I made an offer on an REO last week, but was beaten out by another offer. I am also going to start doing some direct marketing to absentee landlords and possibly probate properties. More on that to come as I have never used these techniques before and I am in the beginning stages of putting something together.