Posted over 9 years ago

First steps to financial freedom!

Its interesting looking back at where you were and where you are now. My wife and I started looking into investment properties back in August of 2014. Really quickly let me give you a short history into our background and why we decided to even consider investment properties. My wife's Dad has about 10 units and my parents have about 4 residential units and one large commercial property. I recall my dad taking me with him going over to a tenants house fixing miscellaneous issues - my Dad is a plumber and now owns a good size plumbing company so he's pretty handy because of that, much of that handy man skill and mindset was passed on to me as I grew up. In short we knew you could make a living doing this, but we didn't know how it really worked and we didn't really know what a good deal was.

We looked and a lot of single family properties at the start but then quickly drifted into small multi families after we figured out how to run the numbers so to speak. We looked for awhile on our own and found a realtor based on a recommendation from a friend who also had some rentals. We kept looking... and looking...and looking... I'm actually surprised our realtor had the patience she had, I think we probably walked through 40 properties before we finally found one that just seemed to be the right fit for our first property.

If you can imagine a kid walking around a pool before putting their foot in the water, that was us... we weren't even testing the water yet, but just "looking" at it.

Here's the thing though - looking back at those 40 or so properties, we learned a ton. We found out what the rent roll was for the area, the crime in the area, school districts, what a property looked like that didn't need a lot of work and one that did and the cost associated for that work. We actually started getting smart and decided to only look at properties that the numbers looked good, only then would we call our realtor, get in a car and meet her to check it out.. And frankly that's when we landed the first duplex we bought.

We found a vacant duplex that a landlord had left after moving out of state. She had actually lived there in the past and rented out one side. Hardwood floors, semi-split level duplex with a 1 car garage on each side, fenced back yard, 2BR, 1BA. She told us she used to rent it out for $650-700 a month. I had done some homework though and found out the area rented for in the $800-900 range. She had recently put a new HVAC in on both sides, new main sewer line outside to the street and a new roof. However it needed some TLC in the kitchens and bathrooms, didnt have a dishwasher or disposal, needed new paint throughout, a few windows needed to be replaced, and the garage door didn't work on one side and the electrical panel & service would never pass an inspection or be insured by an insurance company.

We went home and double checked the numbers with the my predicted rent roll and it had Cash on Cash of just under 16% with a positive cash flow of $621 after taking into consideration vacancy, maintenance, property mgmt and capex (~26%) and after renovations we estimated the ARV to be at $145-150k. The Seller was asking $135k but we knew it needed at least $15k in repairs with the kitchen, baths and electrical plus any unknowns so we negotiated the price to $122k with seller paying 2% closing costs and covering the electrical repairs. We did a conventional 30 yr fixed mortgage at 4.35% with 25% down and closed 40 days later. Here is the cool part - the actual appraisal came back at $145k before we even touched the duplex! So our ARV was potentially off a bit.

Now we had a duplex that needed about $15k in repairs, the electrical had been fixed and now it was time to give it a little face lift. I had my Dad come up with a few of his guys because we had to redo some rails around the stairs and I wanted to add dishwashers and disposals on each side and add stop valves on each plumbing appliance. We ended up replacing the entire sewer line with new PVC because the cast iron was on its last leg and the last thing we needed was a call about a backed up sewer once we had tenants.

We ended up replacing the kitchen flooring, bathroom flooring, painting all the interior walls, garage doors, replaced the fridge and stove on one-side, additional electrical work, fixed the garage door on one side and painted the cabinets to give them a new look and replaced the counter tops and one of the kitchen sinks. All in all we did it for about $9k just under our previous $15k estimate. We finished one side in 3 wks and had our first tenant in there before our first mortgage payment was due and it took another 4 wks to get the other side ready for the 2nd tenant. We could have done that faster if we used contractors but I honestly wanted to learn as much as I could on these first few deals so I could leverage that knowledge in the future.

Our duplex is now estimated at $160k and rents for $850 and $875 with one year leases on both. We now have 60k in equity and after PITI pull in $1009 a month.

We've acquired a second one recently that was rent ready and had just recently been renovated by a flipper which is actually out performing this duplex from a cash flow perspective, however our first deal is just about seasoned so we can take a cash out refi and do this again on our 3rd duplex without using our "own" capital so to speak.

So our advice is this - don't wait too long to get started, take action! What are you waiting for? Go get busy!

Follow me on BP or message me if you have additional questions on this deal and how we did it. I am happy to share!