So, I bought a house yesterday.
I know that it was less than two weeks ago that I told you that I had been thinking about buying a second investment property, and now here I am telling you that I’ve gone ahead and done so.
It was a quick process, really. I had been looking at homes and contemplating buying something for about two months. Finally, on Tuesday, May 1 my brother texted his realtor asking him to send me a list of available homes. I saw the house and put a verbal offer in on Saturday, May 5. All of the papers were signed and the deed exchanged on the 21st, only because I delayed the closing by 4 days.
This was a single family home that had been converted into a two family home years before. The current owner had purchased new refrigerators and ranges and had updated one bathroom. The home seemed to need minor repairs. What I saw was that the carpet in apartment – including the kitchen (who puts carpet in the kitchen?!) – would have to be removed, and the bright pink cabinets in the apartment’s kitchen would have to be repainted. The interior of the entire home could use a fresh coat of paint and the shag carpet in the second apartment would have to be removed if a thorough steam cleaning didn’t work. I would also want to reinforce the balcony for the second floor. Beyond that the yard would need the grass to be cut and the trees trimmed back somewhat and that was it.
I mentally scanned my criteria list for new rental property.
- At least two units. Three would be ideal. (check)
- Outside of flood zone (check)
- Less than $5,000 in remodeling work/repairs needed (check)
- No major repairs such as roof, heater, gas lines needed (check)
- Close to hospital (the main employer for the area) or good school district. (check)
- Off street parking (2 parking spots – check)
- Gas or electric heat (gas check)
- Delivered with no tenants (check)
This house also had some additional benefits. It was located on a very quiet street, had a big fenced-in back yard, and was directly across the street from the local playground. This home would be perfect for a single working person or an older tenant, both of which I love.
My final home buying criteria was a net annual profit as close to $10,000 as possible. I looked at the seller’s disclosure of her current fees. According to the seller, net income was $8,890 after fees and but before debt servicing. Not bad.
The asking price for the house was $49,900, however, it had been on the market for 186 days. After being on the market for some time, the owner had redone the bathroom and updated the home somewhat to make it more attractive, so she was motivated to sell. The realtor had done his homework, because he told me that they had previously accepted an offer of $40,000, but the deal had fallen apart when the new buyer was not able to obtain financing. This is why is pays to have a realtor. Had he not passed that nugget of information along, I would have said that the home was $10,000 more than I wanted to spend for two units and simply walked away from the home.
We moved on to see two more homes, but this house stuck in my mind as I crunched the math. The owner had advertised the apartments for $550 in rent each per month. This included owner paid utilities (except electric), which I wasn’t all too happy about. If the owner pays the utilities, there is nothing to stop a resident from cranking up the heat to 90 degrees and leaving it on all day. One way to offset the costs was to raise the rent. Looking at comparable apartments in the area on Craig’s List, I realized that I could probably rent one unit for as much as $600 per month and the other for as much as $575 per month. Going back to my calculator, if I used those new numbers and the costs were relatively the same as the previous owner, I could expect a net profit of about $9,790.
Having crunched the figures, I turned to my realtor at the end of looking at 5 houses and told him that I was interested in this house. He recommended a lowball offer since she had been willing to sell for $40,000 before, and because I was a cash buyer asking for no concessions. He recommended an offer of $36,000, to which I agreed. He stepped away to call the seller’s realtor to see if they would entertain my verbal offer. I drove off, telling the realtor to call me when he heard something back. Less than 45 minutes later, my offer had been accepted and a tentative closing date set. So, I am now the proud owner of a duplex!
If you’re wondering where I got the cash from, I did use money from my 401(K) to finance the deal as I mentioned before. I know that many of you believe that this was not the right thing to do, but I do think that these homes have the ability to provide me with an income for as long as I wish to hold on to the property. Since I am 34 now, this can go far into distant future. Also, the total purchase price including transfer fees, the title and lien search, and taxes came to $37,747.64. I don’t know of any bank willing to finance a home for $30,000, assuming that I put 20% down. In fact, this home only costs rough $5,000 more than my car did!
So, do you still think that I made a bad decision? Would you have done the same?
